Income Distribution, Credit and Fiscal Policies in an Agent-Based Keynesian Model

Abstract

This work studies the interactions between income distribution and monetary and fiscal policies in terms of ensuing dynamics of macro variables (GDP growth, unemployment, etc.) on the grounds of an agent-based Keynesian model. The direct ancestor of this work is the "Keynes meeting Schumpeter" formalism presented in Dosi et al. (2010). To that model, we add a banking sector and a monetary authority setting interest rates and credit lending conditions. The model combines Keynesian mechanisms of demand generation, a "Schumpeterian" innovation-fueled process of growth and Minskian credit dynamics. The robustness of the model is checked against its capability to jointly account for a large set of empirical regularities both at the micro level and at the macro one. The model is able to catch salient features underlying the current as well as previous recessions, the impact of financial factors and the role in them of income distribution. We find that different income distribution regimes heavily affect macroeconomic performance: more unequal economies are exposed to more severe business cycles fluctuations, higher unemployment rates, and higher probability of crises. On the policy side, fiscal policies do not only dampen business cycles, reduce unemployment and the likelihood of experiencing a huge crisis. In some circumstances they also affect positively long-term growth. Further, the more income distribution is skewed toward profits, the greater the effects of fiscal policies. About monetary policy, we find a strong non-linearity in the way interest rates affect macroeconomic dynamics: in one "regime" with low rates, changes in interest rates are ineffective up to a threshold beyond which increasing the interest rate implies smaller output growth rates and larger output volatility, unemployment and likelihood of crises.

Increasing inequality, consumer credit and financial fragility in an agent based macroeconomic model

“…A similar result can be found in Dosi et al (2013) in which innovation dynamics are investigated. As a matter of fact, rich people may accumulate higher wealth while poor people may suffer from low consumption, creating negative consequences at the macroeconomic level due to a lack of aggregate demand, increasing the likelihood of observing a crisis with large unemployment.…”

Agent based-stock flow consistent macroeconomics: Towards a benchmark model

“…Empirically, agent based macroeconomic models have proven to be capable of reproducing a significant number of micro and macroeconomic stylized facts (see, for example, Dosi et al, 2010Dosi et al, , 2013Dosi et al, , 2015Delli Gatti et al, 2008;Assenza et al, 2015;Riccetti et al, 2014), often outperforming DSGE models . Our feeling is that AB models may greatly benefit from an integration with the SFC accounting framework having the potential to set an alternative paradigm to economic modeling, as advocated by Farmer andFoley (2009), Delli Gatti et al (2010a).…”

“…Riccetti et al (2014) assume banks sets an upper bound to loans that can be grant to single borrowers, expressed as a share of total loans. Dosi et al (2013) assume a maximum level of credit as a multiple of deposits, badly ranked firms may thus result credit constrained if better ranked ones exhaust it. Similarly, van der Hoog and Dawid (2015) and Raberto et al (2012) assume banks are willing to accommodates loan requests as long as their outstanding credit is compatible with capital requirements.…”

Investment hysteresis and potential output: A post-Keynesian–Kaleckian agent-based approach

“…Consistently with most of Keynesian ABM models (Dosi et al, 2013;Seppecher and Salle, 2015), firms estimate their future demand by looking at the variation of inventories: once the ratio of inventories over productive capacity, s t , is equal to a desired reference ratio, s*, firms will only produce the quantity of goods that they expect to be sold, u e,t , which is equal exactly to the variation of inventories, (u t + s t − 1 − s t ). Formally:…”