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

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  • Giovanni Dosi
  • Giorgio Fagiolo
  • Mauro Napoletano
  • Andrea Roventini

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.

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Paper provided by Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy in its series LEM Papers Series with number 2012/03.

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Date of creation: 25 Jan 2012
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Handle: RePEc:ssa:lemwps:2012/03

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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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