The Effects of Fiscal Targets in a Currency Union: A Multi-Country Agent Based-Stock Flow Consistent Model

38 Pages Posted: 25 Jan 2017

See all articles by Alessandro Caiani

Alessandro Caiani

University of Pavia - Faculty of Economics

Ermanno Catullo

Università Politecnica delle Marche

Mauro Gallegati

Università Politecnica delle Marche - Faculty of Economics

Date Written: January 1, 2017

Abstract

We present an Agent-Based Stock Flow Consistent Multi-Country model of a Currency Union to analyze the impact of changes in the fiscal regime of member countries, that is permanent changes in the deficit-to-GDP targets that governments commit to comply. Simulations are performed under three scenarios differentiated for the number of member countries. Though we did not try to estimate empirically the parameters of the model, the configuration employed for our artificial Currency Union yields economically reasonable values for the dynamics of key economic variables, broadly comparable with historical data and available stylized facts, in particular referred to the Euro Area which constitutes the natural point of reference for our work. Our policy experiments show that fiscal expansions generally allow to improve the dynamics of real GDP, labor productivity, and employment, though being associated to higher levels of public debt. On the contrary, permanent fiscal contractions have always strong recessive effects and tend to be self-defeating when the Currency Union includes a higher number of countries and international trade between member countries is more prominent, exacerbating real GDP volatility both in the short and long run. The observed increase of average debt-GDP ratios in these scenarios seems to be mainly attributable to the raise of public debt-to-GDP in poorer and less productive countries, which is mirrored by a reduction of the countries’ net foreign asset position. In the conclusions we discuss current limitations of the model and we sketch out the future lines of development.

Keywords: Agent Based Macroeconomics, Stock Flow Consistent Models, European Integration, Fiscal Policy

JEL Classification: E62, F15, C63

Suggested Citation

Caiani, Alessandro and Catullo, Ermanno and Gallegati, Mauro, The Effects of Fiscal Targets in a Currency Union: A Multi-Country Agent Based-Stock Flow Consistent Model (January 1, 2017). Available at SSRN: https://ssrn.com/abstract=2904953 or http://dx.doi.org/10.2139/ssrn.2904953

Alessandro Caiani (Contact Author)

University of Pavia - Faculty of Economics ( email )

Corso Strada Nuova, 65
27100 Pavia
Italy

Ermanno Catullo

Università Politecnica delle Marche ( email )

Piazzale Martelli 8
Ancona, 18039
Italy

Mauro Gallegati

Università Politecnica delle Marche - Faculty of Economics ( email )

Piazzale Martelli, 8
60121 Ancona
Italy
++390712207188 (Phone)
++390712207102 (Fax)

Register to save articles to
your library

Register

Paper statistics

Downloads
215
Abstract Views
717
rank
141,031
PlumX Metrics