The Fiscal Cost of Financial Instability

31 Pages Posted: 12 Feb 2011

See all articles by Corrado Di Guilmi

Corrado Di Guilmi

University of Technology Sydney (UTS) - UTS Business School

Carl Chiarella

University of Technology, Sydney - UTS Business School, Finance Discipline Group

Date Written: February 9, 2011

Abstract

This paper presents an agent based model that investigates the possible outcomes of different fiscal and regulatory policies in a financially fragile economy. We analyse the consequences of the attempt by the government to counteract a downturn ignoring the debt dynamics as modelled by Fisher and Minsky. In particular we formulate an educated guess about the burden that the government and the taxpayer must bear when a bubble bursts, and its relationship with the extent of government intervention and the taxation system. We also evaluate the outcomes of possible alternatives or complementary regulatory policies. We model four different scenarios treating separately a tax on profits and a tax on private wealth and, for both of them, we specify two cases depending on whether the financial system is able to autonomously generate liquidity. Therefore we can assess the effect of endogenous money and endogenous credit on the different stabilization policies.

Keywords: financial fragility, agent based model, fiscal policy, public deficit

JEL Classification: E22, E32, E62

Suggested Citation

Di Guilmi, Corrado and Chiarella, Carl, The Fiscal Cost of Financial Instability (February 9, 2011). Available at SSRN: https://ssrn.com/abstract=1759023 or http://dx.doi.org/10.2139/ssrn.1759023

Corrado Di Guilmi

University of Technology Sydney (UTS) - UTS Business School ( email )

Sydney
Australia

Carl Chiarella (Contact Author)

University of Technology, Sydney - UTS Business School, Finance Discipline Group ( email )

PO Box 123
Broadway, NSW 2007
Australia
+61 2 9514 7719 (Phone)
+61 2 9514 7711 (Fax)

HOME PAGE: http://www.business.uts.edu.au/finance/

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