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Fiscal and monetary policies in complex evolving economies

  • Fagiolo G.
  • Treibich T.G.
  • Roventini A.
  • Napoletano M.
  • Dosi G.

    (GSBE)

In this paper we explore the effects of alternative combinations of fiscal and monetary policies under different income distribution regimes. In particular, we aim at evaluating fiscal rules in economies subject to banking crises and deep recessions. We do so using an agent-based model populated by heterogeneous capital- and consumption-good firms, heterogeneous banks, workers/consumers, a central bank and a government. We show that the model is able to reproduce a wide array of macro and micro empirical regularities, including stylized facts concerning financial dynamics and banking crises. Simulation results suggest that the most appropriate policy mix to stabilize the economy requires unconstrained anti-cyclical fiscal policies, where automatic stabilizers are free to dampen business cycles fluctuations, and a monetary policy targeting also employment. Instead,discipline-guided fiscal rules such as the Stability and Growth Pact or the Fiscal Compact in the eurozone always depress the economy, without improving public finances, even when escape clauses in case of recessions are considered. Consequently, austerity policies appear to be in general self-defeating. Furthermore, we show that the negative effects of austere fiscal rules are magnified by conservative monetary policies focused on inflation stabilization only. Finally, the effects of monetary and fiscal policies become sharper as the level of income inequality increases.

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Paper provided by Maastricht University, Graduate School of Business and Economics (GSBE) in its series Research Memorandum with number 006.

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Date of creation: 2014
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Handle: RePEc:unm:umagsb:2014006
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