Budgetary rigour with stimulus in lean times: Policy advices from an agent-based model

Abstract

The 2008 financial crisis, and the subsequent global recession, triggered a widespread economic and political debate on the proper policy combination to deal with the crisis and to prevent similar ones in the future. Probably, the main dispute has been around the use of fiscal instruments in order to foster growth while keeping public debt under control. The European Union, for instance, endorsed measures for fiscal consolidation but has been sharply criticized by several scholars as well as Nobel Laureates. This paper aims at contributing to this debate by presenting the outcomes of a computational study performed with the Eurace agent-based model. We set up an experiment with two base policy scenarios, i.e., stability and growth pact and fiscal compact, incrementally enriching them with complementary policies which relax fiscal rigidity and introduce quantitative easing. We are therefore able to compare eight policy combinations, spanning different degrees of fiscal and monetary expansion. Results show that budgetary rigour performs well if and only if some mechanisms of fiscal relaxation and monetary accommodation are considered during bad times; thus confirming in a richer and more realistic model setting the fundamental tenet of Keynesian economics about the importance of sustaining aggregate demand during recessions. AbstractThe 2008 financial crisis, and the subsequent global recession, triggered a widespread economic and political debate on the proper policy combination to deal with the crisis and to prevent similar ones in the future. Probably, the main dispute has been around the use of fiscal instruments in order to foster growth while keeping public debt under control. The European Union, for instance, endorsed measures for fiscal consolidation but has been sharply criticized by several scholars as well as Nobel Laureates. This paper aims at contributing to this debate by presenting the outcomes of a computational study performed with the Eurace agent-based model. We set up an experiment with two base policy scenarios, i.e., stability and growth pact and fiscal compact, incrementally enriching them with complementary policies which relax fiscal rigidity and introduce quantitative easing. We are therefore able to compare eight policy combinations, spanning di↵erent degrees of fiscal and monetary expansion. Results show that budgetary rigour performs well if and only if some mechanisms of fiscal relaxation and monetary accommodation are considered during bad times; thus confirming in a richer and more realistic model setting the fundamental tenet of Keynesian economics about the importance of sustaining aggregate demand during recessions.

An Agent-based Stock-flow Consistent Model of the Sustainable Transition in the Energy Sector

“…The model presented in this paper is an enrichment of the macroeconomic agent-based simulator Eurace (Cincotti et al, , 2012aRaberto et al, 2012;Teglio et al, 2012;Raberto et al, 2014;Teglio et al, 2015). Eurace originally included the following agents: households (HHs), acting as workers, consumers and financial investors; consumption goods producers (CGPs), which are firms producing a homogenous consumption good; a capital goods producer (KGP), commercial banks (Bs) and two policy makers, namely a government (G) and a central bank (CB), in charge of fiscal and monetary policy, respectively.…”

“…Eurace originally included the following agents: households (HHs), acting as workers, consumers and financial investors; consumption goods producers (CGPs), which are firms producing a homogenous consumption good; a capital goods producer (KGP), commercial banks (Bs) and two policy makers, namely a government (G) and a central bank (CB), in charge of fiscal and monetary policy, respectively. A detailed description of agents behaviour and interactions in the different markets is provided in (Teglio et al, 2015).…”

“…To this purpose, we consider now a production function characterized by a nested Cobb-Douglas and Leontief technology where the usual Cobb-Douglas production function, characterized by labor N and capital K inputs (see Eq. 8 of Teglio et al (2015)), is coupled with a third non-substitutable input, i.e. the amount of electricity q E f , as follows:…”

“…the day of production planning and execution, which are different across firms, see Teglio et al (2015) for further details. However, at the beginning of each month the PP agent has to set the electricity price p E that will be valid for the rest of the month and will be taken into account by firms for their production planning cost assessment.…”

“…Our goal is to devise the better policy combination that improves the long-term benefits with respect to the short-term costs for the macroeconomy as a whole. In order to investigate the macroeconomic effects of the sustainability transition in the energy sector, we employ and enrich the agent-based macroeconomic model and simulator Eurace as it will be outlined in the following section (Cincotti et al, , 2012aRaberto et al, 2012;Teglio et al, 2012;Raberto et al, 2014;Teglio et al, 2015).…”