Stabilization Policies and Long Term Growth: Policy Implications from an Agent-Based Macroeconomic Model

Abstract

Do fiscal stabilization policies affect the long-term growth of the economy? If so, are the long-term effects growth-enhancing or growth-reducing? These questions have again become relevant to the political and academic debate since governments have been forced to spend considerable funds for economic stimulus packages as a response to the recent economic crisis. The answers provided by the economic literature are inconclusive. But a general observation is that, while the theoretical literature has emphasized the importance of structural issues as, e.g., the modeling approach of endogenous technological change, less attention has been paid to an elaborate design of the considered fiscal stabilization policies. This paper uses a closed agent-based macroeconomic model that generates endogenous business cycles to emphasize the role of the policy design for long-term growth effects of stabilization policies. By comparing a demand-oriented consumption policy and two different investment subsidizing policies, we can show that the considered policies are equally successful in smoothing the business cycle, but have different implications for the medium and long-term growth of the economy. Hence, not only modeling assumptions as stressed by the literature but also the concrete implementation of the policy seems to be important for the analysis of long-term effects of stabilization policies.

Agent-Based Macroeconomics

“…For an application to firm dynamics, see . Fiscal policies are analysed in Harting (2015) and Dawid et al (2018b). Two papers on financial and macro-prudential issues: van der Hoog and Dawid (2017), van der Hoog (2018).…”

“…Whereas this rule seems less myopic it still does not involve any explicitly forward looking planning of the firm. Harting (2015) has developed an extension of the EUBI model, in which investment is determined in a forward looking way using a real-option approach. Also, in most MABMs the firm's demand for inputs (capital and labor) are dictated by the decision on the scale of activity, which is typically driven by observed past demand for the goods produced by the firm.…”

“…Similarly to Neveu (2013), also Harting (2015) studies the implications of different fiscal responses to downturns on the growth rate and volatility of the economy. In the framework of an extended version of the Eurace@Unibi model (EUBI) the following three scenarios are compared, where in each a special fiscal policy is activated once the growth rate of output drops below a given threshold.…”

“…Since in the Eurace@Unibi model the vintage choice of firms is determined by the comparison of the ratio of expected future return to price of each vintage, the third rule influences the technology choice of firms and fosters the acquisition of frontier vintages. Main insights from the analysis in Harting (2015) are that all three policies are able to reduce the volatility in the economic dynamics. However in order to achieve the same reduction of volatility the demand oriented first measure requires substantially larger fiscal expenditures during the downturns than the other two technology oriented rules.…”

Macroeconomic Policy in DSGE and Agent-Based Models Redux: New Developments and Challenges Ahead

“…Finally, austerity policies can also reduce long-run productivity and GDP growth, by harming innovation rate and the diffusion of new technologies (Dosi et al, 2014b) and firms' investment rates (Bassi and Lang, 2016). In fact, stabilization policies can affect both short-and long-run dynamics as found also by Russo et al (2007) and Harting (2015).…”