IDEAS home Printed from https://ideas.repec.org/a/eee/ecmode/v52y2016ipap35-49.html
   My bibliography  Save this article

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

Author

Listed:
  • Bassi, Federico
  • Lang, Dany

Abstract

This paper shows that negative economic shocks can have permanent effects on potential output—the amount that can be produced if the economy is at full capacity. In order to do so, we build an agent-based model of growth and distribution where heterogeneous firms adjust capital accumulation discontinuously because of sunk costs and of market constraints. This economy is characterized by a particular form of path dependency, “genuine hysteresis”: the most important temporary shocks affect potential output permanently. The results of the simulations implemented show indeed that austerity policies that trigger debt deleveraging, precautionary saving and wage tightening affect negatively the long-run path of the economy. As a matter of consequence, our paper sheds some light on issues that many European countries have been facing since 2008, and puts into question the possibility for most of these countries to reach the pre-crisis rates of growth. The most likely scenario for Europe in the upcoming decades is therefore a chronicle underutilization of fixed productive capacity and labour force.

Suggested Citation

  • Bassi, Federico & Lang, Dany, 2016. "Investment hysteresis and potential output: A post-Keynesian–Kaleckian agent-based approach," Economic Modelling, Elsevier, vol. 52(PA), pages 35-49.
  • Handle: RePEc:eee:ecmode:v:52:y:2016:i:pa:p:35-49
    DOI: 10.1016/j.econmod.2015.06.022
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0264999315001777
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Rod Cross & Hugh McNamara & Alexei Pokrovskii, 2012. "Memory of recessions," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 34(3), pages 413-430.
    2. Christian Schoder, 2012. "Hysteresis In The Kaleckian Growth Model: A Bayesian Analysis For The Us Manufacturing Sector From 1984 To 2007," Metroeconomica, Wiley Blackwell, vol. 63(3), pages 542-568, July.
    3. Dutt, Amitava Krishna, 1984. "Stagnation, Income Distribution and Monopoly Power," Cambridge Journal of Economics, Oxford University Press, vol. 8(1), pages 25-40, March.
    4. Salle, Isabelle L., 2015. "Modeling expectations in agent-based models — An application to central bank's communication and monetary policy," Economic Modelling, Elsevier, vol. 46(C), pages 130-141.
    5. Cross, Rod, 1994. "The Macroeconomic Consequences of Discontinuous Adjustment: Selective Memory of Non-dominated Extrema," Scottish Journal of Political Economy, Scottish Economic Society, vol. 41(2), pages 212-221, May.
    6. Chang, Ming-Jen & Su, Che-Yi, 2014. "Hysteresis versus natural rate in Taiwan's unemployment: Evidence from the educational attainment categories," Economic Modelling, Elsevier, vol. 43(C), pages 293-304.
    7. Engelbert Stockhammer & Simon Sturn, 2012. "The impact of monetary policy on unemployment hysteresis," Applied Economics, Taylor & Francis Journals, vol. 44(21), pages 2743-2756, July.
    8. Alesina, Alberto & Favero, Carlo & Giavazzi, Francesco, 2015. "The output effect of fiscal consolidation plans," Journal of International Economics, Elsevier, vol. 96(S1), pages 19-42.
    9. Cheng, Ka Ming & Durmaz, Nazif & Kim, Hyeongwoo & Stern, Michael L., 2012. "Hysteresis vs. natural rate of US unemployment," Economic Modelling, Elsevier, vol. 29(2), pages 428-434.
    10. Dosi, Giovanni & Fagiolo, Giorgio & Napoletano, Mauro & Roventini, Andrea, 2013. "Income distribution, credit and fiscal policies in an agent-based Keynesian model," Journal of Economic Dynamics and Control, Elsevier, vol. 37(8), pages 1598-1625.
    11. Layard, Richard & Nickell, Stephen & Jackman, Richard, 2005. "Unemployment: Macroeconomic Performance and the Labour Market," OUP Catalogue, Oxford University Press, number 9780199279173.
    12. Valerie Cerra & Sweta Chaman Saxena, 2008. "Growth Dynamics: The Myth of Economic Recovery," American Economic Review, American Economic Association, vol. 98(1), pages 439-457, March.
    13. Nicholas Kaldor, 1955. "Alternative Theories of Distribution," Review of Economic Studies, Oxford University Press, vol. 23(2), pages 83-100.
    14. Laurence Ball, 2014. "Long-term damage from the Great Recession in OECD countries," European Journal of Economics and Economic Policies: Intervention, Edward Elgar Publishing, vol. 11(2), pages 149-160, September.
    15. Robert M. Solow, 1956. "A Contribution to the Theory of Economic Growth," The Quarterly Journal of Economics, Oxford University Press, vol. 70(1), pages 65-94.
    16. Smith, Adam, 1776. "An Inquiry into the Nature and Causes of the Wealth of Nations," History of Economic Thought Books, McMaster University Archive for the History of Economic Thought, number smith1776.
    17. Antonella Palumbo & Attilio Trezzini, 2003. "Growth without normal capacity utilization," The European Journal of the History of Economic Thought, Taylor & Francis Journals, vol. 10(1), pages 109-135.
    18. repec:edn:sirdps:172 is not listed on IDEAS
    19. Steve Keen, 1995. "Finance and Economic Breakdown: Modeling Minsky’s “Financial Instability Hypothesis”," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 17(4), pages 607-635, July.
    20. Pascal Seppecher & Isabelle Salle, 2015. "Deleveraging crises and deep recessions: a behavioural approach," Applied Economics, Taylor & Francis Journals, vol. 47(34-35), pages 3771-3790, July.
    21. repec:ilo:ilowps:478623 is not listed on IDEAS
    22. Bhaduri, Amit & Marglin, Stephen, 1990. "Unemployment and the Real Wage: The Economic Basis for Contesting Political Ideologies," Cambridge Journal of Economics, Oxford University Press, vol. 14(4), pages 375-393, December.
    23. Avinash Dixit, 1992. "Investment and Hysteresis," Journal of Economic Perspectives, American Economic Association, vol. 6(1), pages 107-132, Winter.
    24. Mario Cassetti, 2006. "A note on the long-run behaviour of Kaleckian models," Review of Political Economy, Taylor & Francis Journals, vol. 18(4), pages 497-508.
    25. Eckhard Hein, 2006. "Wage Bargaining and Monetary Policy in a Kaleckian Monetary Distribution and Growth Model: Trying to Make Sense of the NAIRU," European Journal of Economics and Economic Policies: Intervention, Edward Elgar Publishing, vol. 3(2), pages 305-329.
    26. Piscitelli, Laura & Cross, Rod & Grinfeld, Michael & Lamba, Harbir, 2000. "A Test for Strong Hysteresis," Computational Economics, Springer;Society for Computational Economics, vol. 15(1-2), pages 59-78, April.
    27. Mario Cassetti, 2003. "Bargaining power, effective demand and technical progress: a Kaleckian model of growth," Cambridge Journal of Economics, Oxford University Press, vol. 27(3), pages 449-464, May.
    28. Servaas Storm & C.W.M. Naastepad, 2015. "Europe’s Hunger Games: Income Distribution, Cost Competitiveness and Crisis," Cambridge Journal of Economics, Oxford University Press, vol. 39(3), pages 959-986.
    29. Storm, Servaas & Naastepad, C. W. M., 2012. "Macroeconomics Beyond the NAIRU," Economics Books, Harvard University Press, number 9780674062276, December.
    30. Onaran, Özlem. & Galanis, Giorgos., 2012. "Is aggregate demand wage-led or profit-led? National and global effects," ILO Working Papers 994786233402676, International Labour Organization.
    31. Setterfield, Mark, 1998. "Adjustment Asymmetries and Hysteresis in Simple Dynamic Models," The Manchester School of Economic & Social Studies, University of Manchester, vol. 66(3), pages 283-301, June.
    32. Cross, Rod, 1993. "On the Foundations of Hysteresis in Economic Systems," Economics and Philosophy, Cambridge University Press, vol. 9(01), pages 53-74, April.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Giorgio Fagiolo & Andrea Roventini, 2017. "Macroeconomic Policy in DSGE and Agent-Based Models Redux: New Developments and Challenges Ahead," Journal of Artificial Societies and Social Simulation, Journal of Artificial Societies and Social Simulation, vol. 20(1), pages 1-1.
    2. repec:hal:wpaper:hal-01314335 is not listed on IDEAS
    3. repec:ksa:szemle:1774 is not listed on IDEAS
    4. Dosi, Giovanni & Pereira, Marcelo C. & Roventini, Andrea & Virgillito, Maria Enrica, 2017. "Causes and Consequences of Hysteresis: Aggregate Demand, Productivity and Employment," GLO Discussion Paper Series 64, Global Labor Organization (GLO).
    5. repec:ksa:szemle:1798 is not listed on IDEAS
    6. Palley, Thomas, 2017. "A theory of economic policy lock-in and lock-out via hysteresis: Rethinking economists' approach to economic policy," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy (IfW), vol. 11, pages 1-18.
    7. Pascal Seppecher & Isabelle Salle & Dany Lang, 2016. "Is the Market Really a Good Teacher? Market Selection, Collective Adaptation and Financial Instability," GREDEG Working Papers 2016-15, Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), University of Nice Sophia Antipolis.
    8. Pascal Seppecher & Isabelle Salle & Dany Lang, 2016. "Is the Market Really a Good Teacher? Market Selection, Collective Adaptation and Financial Instability," GREDEG Working Papers 2016-15, Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), University of Nice Sophia Antipolis.
    9. Emanuele Russo, 2017. "Harrodian instability in decentralized economies: an agent-based approach," LEM Papers Series 2017/17, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
    10. repec:eee:ecmode:v:69:y:2018:i:c:p:181-192 is not listed on IDEAS

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:ecmode:v:52:y:2016:i:pa:p:35-49. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu). General contact details of provider: http://www.elsevier.com/locate/inca/30411 .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.