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Outside the corridor: fiscal multipliers and business cycles into an agent-based model with liquidity constraints

Listed author(s):
  • Mauro Napoletano

    (Observatoire français des conjonctures économiques)

  • Jean-Luc Gaffard

    (Observatoire français des conjonctures économiques)

  • Andrea Roventini

    (Laboratory of Economics and Management)

We build an agent-based model to study how fiscal multipliers can change over the business cycle. Our approach considers the economy as a complex evolving system. In that, fiscal state-dependent multipliers are emergent disequilibrium phenomenon stemming from the interaction among an ecology of heterogeneous agents. We study fiscal multipliers in response to dfferent microeconomic shocks hitting the economy. We show that defficit-spending fiscal policy dampens the effect of a shock and lowers its persistence. Moreover, we show that the size and dynamics of the fiscal multi- plier is inversely related to the evolution of credit rationing in the aftermath of the shock. We also investigate the effects of two different balanced budget rules. In the first type of such experiments, government expenditure is constrained to be equal to tax revenues of each period. In the second one the tax rate is eventually raised to balance a given level of government expenditure. We show that fiscal multipliers are very low with both balanced-budget rules. Finally, we show that fiscal multipliers are higher into more leveraged economies.

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File URL: http://spire.sciencespo.fr/hdl:/2441/60095rf63b990rn4c1acm25tq6/resources/wp2014-16.pdf
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Paper provided by Sciences Po in its series Sciences Po publications with number 2014-16.

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Date of creation: Sep 2014
Handle: RePEc:spo:wpmain:info:hdl:2441/60095rf63b990rn4c1acm25tq6
Contact details of provider: Web page: http://www.sciencespo.fr/

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  1. repec:nbr:nberch:13342 is not listed on IDEAS
  2. Bachmann, Rüdiger & Sims, Eric R., 2012. "Confidence and the transmission of government spending shocks," Journal of Monetary Economics, Elsevier, vol. 59(3), pages 235-249.
  3. 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.
  4. Olivier J. Blanchard & Daniel Leigh, 2013. "Growth Forecast Errors and Fiscal Multipliers," American Economic Review, American Economic Association, vol. 103(3), pages 117-120, May.
  5. Alan J. Auerbach & Yuriy Gorodnichenko, 2012. "Measuring the Output Responses to Fiscal Policy," American Economic Journal: Economic Policy, American Economic Association, vol. 4(2), pages 1-27, May.
  6. Gatti, Domenico Delli & Guilmi, Corrado Di & Gaffeo, Edoardo & Giulioni, Gianfranco & Gallegati, Mauro & Palestrini, Antonio, 2005. "A new approach to business fluctuations: heterogeneous interacting agents, scaling laws and financial fragility," Journal of Economic Behavior & Organization, Elsevier, vol. 56(4), pages 489-512, April.
  7. Gauti B. Eggertsson & Paul Krugman, 2012. "Debt, Deleveraging, and the Liquidity Trap: A Fisher-Minsky-Koo Approach," The Quarterly Journal of Economics, Oxford University Press, vol. 127(3), pages 1469-1513.
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