Fiscal and Monetary Policies in Complex Evolving Economies

38 Pages Posted: 25 Feb 2014

See all articles by Giovanni Dosi

Giovanni Dosi

Scuola Superiore Sant'Anna di Pisa - Laboratory of Economics and Management (LEM)

Giorgio Fagiolo

Scuola Superiore Sant'Anna di Pisa - Laboratory of Economics and Management (LEM)

Mauro Napoletano

Observatoire Français des Conjonctures Economiques (OFCE); SKEMA Business School; Scuola Superiore Sant'Anna di Pisa - Laboratory of Economics and Management (LEM)

Andrea Roventini

Scuola Superiore Sant'Anna di Pisa - Laboratory of Economics and Management (LEM); Observatoire Français des Conjonctures Economiques (OFCE)

Tania Treibich

Maastricht University - Department of Economics; Scuola Superiore Sant'Anna di Pisa; Observatoire Français des Conjonctures Economiques (OFCE)

Date Written: February 24, 2014

Abstract

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 stabilize the economy requires unconstrained counter-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.

Keywords: agent-based model, fiscal policy, monetary policy, banking crises, income inequality, austerity policies, disequilibrium dynamics

JEL Classification: C63, E32, E6, E52, G01, G21, O4

Suggested Citation

Dosi, Giovanni and Fagiolo, Giorgio and Napoletano, Mauro and Roventini, Andrea and Treibich, Tania, Fiscal and Monetary Policies in Complex Evolving Economies (February 24, 2014). Available at SSRN: https://ssrn.com/abstract=2400648 or http://dx.doi.org/10.2139/ssrn.2400648

Giovanni Dosi (Contact Author)

Scuola Superiore Sant'Anna di Pisa - Laboratory of Economics and Management (LEM) ( email )

Piazza Martiri della Liberta, 33
Pisa, I-56127
Italy

HOME PAGE: www.lem.sssup.it

Giorgio Fagiolo

Scuola Superiore Sant'Anna di Pisa - Laboratory of Economics and Management (LEM) ( email )

Piazza Martiri della Liberta', 33-I-56127
Pisa
Italy

Mauro Napoletano

Observatoire Français des Conjonctures Economiques (OFCE) ( email )

60, rue Dostoïevski
Sophia-Antipolis Cedex, 06902
France

HOME PAGE: http://www.ofce.sciences-po.fr

SKEMA Business School ( email )

60 rue Dostoïevski
Sophia Antipolis, 06902
France

Scuola Superiore Sant'Anna di Pisa - Laboratory of Economics and Management (LEM) ( email )

Piazza Martiri della Liberta, 33
Pisa, I-56127
Italy

Andrea Roventini

Scuola Superiore Sant'Anna di Pisa - Laboratory of Economics and Management (LEM) ( email )

Piazza Martiri della Liberta', 33-I-56127
Pisa
Italy

Observatoire Français des Conjonctures Economiques (OFCE)

69 Quai d'Orsay
Paris 75004
France

Tania Treibich

Maastricht University - Department of Economics ( email )

P.O. Box 616
Maastricht, 6200 MD
Netherlands

Scuola Superiore Sant'Anna di Pisa ( email )

Pisa
Italy

Observatoire Français des Conjonctures Economiques (OFCE) ( email )

69 Quai d'Orsay
Paris 75004
France

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