2014/07 | LEM Working Paper Series | ||||||||||||||||
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Fiscal and Monetary Policies in Complex Evolving Economies |
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Giovanni Dosi, Giorgio Fagiolo, Mauro Napoletano, Andrea Roventini, Tania Treibich |
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Keywords | |||||||||||||||||
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agent-based model, fiscal policy, monetary policy, banking crises, income inequality, austerity policies, disequilibrium dynamic
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JEL Classifications | |||||||||||||||||
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C63, E32, E6, E52, G01, G21, O4
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Abstract | |||||||||||||||||
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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 stylised facts
concerning financial dynamics and banking crises. Simulation results
suggest that the most appropriate policy mix to stabilise the economy
requires unconstrained counter-cyclical fiscal policies, where automatic
stabilisers 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 magnfiied by conservative monetary policies
focused on inflation stabilisation only. Finally, the effects of monetary
and fiscal policies become sharper as the level of income inequality
increases.
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