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Animal spirits, bankruptcies, and monetary policy effectiveness in a hybrid macroeconomic agent-based financial accelerator model

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  • Davide Bazzana

    (University of Brescia
    Fondazione Eni Enrico Mattei (FEEM))

Abstract

This paper develops a hybrid model with an agent-based financial accelerator framework embedded in a standard new Keynesian economy. It explores the interactions between the financial accelerator and the credit market, focusing on the effects of bankruptcy. The paper replicates credit-market relationships, modeling various credit crunch scenarios. It uncovers endogenous fluctuations and “animal spirits” in entrepreneurs’ expectations, driving investment and production decisions. Notably, higher pro-cyclical leverage can have destabilizing effects in the presence of small shocks, increasing entrepreneurs’ bankruptcies. The results suggest that monetary policy’s effectiveness in stabilizing fluctuations depends on factors such as heterogeneity, bounded rationality, and heuristic updating mechanisms. Moderate monetary policies perform better in terms of economic growth with moderate-to-low volatility, while aggressive policies on inflation assist bounded rational agents in reducing errors in investment decisions and default rates, fostering a more stable macroeconomic environment. Increasing forecasting options introduces diversification among entrepreneurs, reducing volatility and stabilizing investments. More options mitigate investment fluctuations, acting as a counterbalance to prevailing market sentiments. Over time, individuals weakly adhering to trends or adopting contrarian approaches come to dominate the population of entrepreneurs, enhancing the overall stability of investment decisions.

Suggested Citation

  • Davide Bazzana, 2024. "Animal spirits, bankruptcies, and monetary policy effectiveness in a hybrid macroeconomic agent-based financial accelerator model," Journal of Evolutionary Economics, Springer, vol. 34(1), pages 29-61, January.
    • Handle: RePEc:spr:joevec:v:34:y:2024:i:1:d:10.1007_s00191-024-00856-8
    DOI: 10.1007/s00191-024-00856-8
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    More about this item

    Keywords

    Heterogeneity; Financial accelerator; Bankruptcy; Monetary policy;
    All these keywords.

    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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