Fiscal and Monetary Policies in Complex Evolving Economies

Abstract

In this paper we explore the effects of alternative combinations of fiscal and monetary policies under different income distribution regimes. In particular, we aim at evaluating fiscal rules in economies subject to banking crises and deep recessions. We do so using an agent-based model populated by heterogeneous capital-and consumption-good firms, heterogeneous banks, workers/consumers, a Central Bank and a Government. We show that the model is able to reproduce a wide array of macro and micro empirical regularities, including stylised facts concerning financial dynamics and banking crises. Simulation results suggest that the most appropriate policy mix to stabilise the economy requires unconstrained counter-cyclical fiscal policies, where automatic stabilisers are free to dampen business cycles fluctuations, and a monetary policy targeting also employment. Instead, "discipline-guided" fiscal rules such as the Stability and Growth Pact or the Fiscal Compact in the Eurozone always depress the economy, without improving public finances, even when escape clauses in case of recessions are considered. Consequently, austerity policies appear to be in general self-defeating. Furthermore, we show that the negative effects of austere fiscal rules are magnified by conservative monetary policies focused on inflation stabilisation only. Finally, the effects of monetary and fiscal policies become sharper as the level of income inequality increases.

In order to stand up you must keep cycling: Change and coordination in complex evolving economies

“…Within a growing ensemble of ABM efforts (see Fagiolo and Roventini, 2016 for a recent survey), the authors of this note intend to proceed in refining and developing upon the family of "Schumpeter meeting Keynes" models (Dosi et al, 2013(Dosi et al, , 2015a(Dosi et al, , 2010(Dosi et al, , 2016a. They clearly meet Solow, (2008)'s plea for microheterogeneity: a multiplicity of agents interact without any ex ante commitment to the reciprocal consistency of their actions.…”

Bubbles, Crashes, and the Financial Cycle: The Impact of Banking Regulation on Deep Recessions

“…Mandel et al, 2010;Dawid et al, 2014;Dosi et al, 2010Dosi et al, , 2013Dosi et al, , 2015Dawid et al, 2018a). These models incorporate heterogeneity of different agent types (households, firms, banks) along various relevant dimensions (skill levels, capital stocks, financial variables).…”

“…As discussed extensively e.g. in Dawid et al (2018a) and Dosi et al (2015), many of these models are able to replicate a large set of stylized facts at different levels of aggregation, and can be used to highlight the economic processes that generate these fluctuations. Agent-based macroeconomic models have a number of advantages over more standard macro models.…”

Agent-Based Macroeconomics and Classical Political Economy: Some Italian Roots

“…The Schumpeter meeting Keynes (K+S) family of models developed in Dosi et al (2010Dosi et al ( , 2013Dosi et al ( , 2015 bridges Schumpeterian theories of technical change and endogenous growth with Keynesian insights of coordination failures and endogenous fluctuations. Starting from evolutionary roots (Nelson and Winter, 1982;Dosi, 1988), the K+S model embeds the Schumpeterian growth paradigm into a complex system of imperfect coordination among heterogeneous interacting firms and banks, wherein Keynesian (demand-related) and Minskian (credit cycle) elements feed back into the meso and macro dynamics.…”

“…Finally, austerity fiscal policies (e.g. Fiscal Compact) have a negative impact on both the short-run performance of the economy (Dosi et al, 2015), as well as on the technological innovation and diffusion, thus reducing long-run GDP growth (Dosi et al, 2016b). Austerity policies are also self-defeating as they are not able to stabilize the public budget.…”