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

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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.

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Paper provided by Observatoire Francais des Conjonctures Economiques (OFCE) in its series Documents de Travail de l'OFCE with number 2012-06.

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Date of creation: Feb 2012
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Handle: RePEc:fce:doctra:1206

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Keywords: agent-based Keynesian models; multiple equilibria; fiscal and monetary policies; income distribution; transmission mechanisms; credit constraints;

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Cited by:
  1. Giorgio Fagiolo & Andrea Roventini, 2012. "Macroeconomic Policy in DSGE and Agent-Based Models," EconomiX Working Papers 2012-17, University of Paris West - Nanterre la Défense, EconomiX.
  2. Tommaso Ferraresi & Andrea Roventini & Giorgio Fagiolo, 2013. "Fiscal policies and credit regimes: a tvar approach," Documents de Travail de l'OFCE 2013-02, Observatoire Francais des Conjonctures Economiques (OFCE).
  3. Fagiolo G. & Treibich T.G. & Roventini A. & Napoletano M. & Dosi G., 2014. "Fiscal and monetary policies in complex evolving economies," Research Memorandum 006, Maastricht University, Graduate School of Business and Economics (GSBE).
  4. Russo, Alberto & Riccetti, Luca & Gallegati, Mauro, 2013. "Increasing Inequality and Financial Fragility in an An Agent Based Macroeconomic Model," MPRA Paper 51528, University Library of Munich, Germany.
  5. Mauro Napoletano & Giovanni Dosi & Giorgio Fagiolo & Andrea Roventini, 2012. "Wage formation investment behavior and growth regimes: an agent-based analysis," Sciences Po publications info:hdl:2441/f4rshpf3v1u, Sciences Po.
  6. Riccetti, Luca & Russo, Alberto & Mauro, Gallegati, 2013. "Financial Regulation in an Agent Based Macroeconomic Model," MPRA Paper 51013, University Library of Munich, Germany.
  7. Ricetti, Luca & Russo, Alberto & Gallegati, Mauro, 2013. "Unemployment benefits and financial leverage in an agent based macroeconomic model," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 7(42), pages 1-44.
  8. Bargigli, Leonardo & Gallegati, Mauro & Riccetti, Luca & Russo, Alberto, 2014. "Network analysis and calibration of the “leveraged network-based financial accelerator”," Journal of Economic Behavior & Organization, Elsevier, vol. 99(C), pages 109-125.
  9. Riccetti, Luca & Russo, Alberto & Gallegati, Mauro, 2012. "An Agent Based Decentralized Matching Macroeconomic Model," MPRA Paper 42211, University Library of Munich, Germany.
  10. Alessandro Caiani & Antoine Godin & Stefano Lucarelli, 2013. "Innovation and Finance: A Stock Flow Consistent Analysis of Great Surges of Development," INET Research Notes 34, Institute for New Economic Thinking (INET).
  11. Erlingsson, Einar Jon & Teglio, Andrea & Cincotti, Silvano & Stefansson, Hlynur & Sturlusson, Jon Thor & Raberto, Marco, 2014. "Housing market bubbles and business cycles in an agent-based credit economy," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 8(8), pages 1-42.
  12. Erlingsson, Einar Jon & Cincotti, Silvano & Stefansson, Hlynur & Sturlusson, Jon Thor & Teglio, Andrea & Raberto, Marco, 2013. "Housing market bubbles and business cycles in an agent-based credit economy," Economics Discussion Papers 2013-32, Kiel Institute for the World Economy.
  13. Riccetti, Luca & Russo, Alberto & Gallegati, Mauro, 2013. "Unemployment benefits and financial factors in an agent-based macroeconomic model," Economics Discussion Papers 2013-9, Kiel Institute for the World Economy.

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