Financial shocks and their effects on velocity of money in agent-based model

Boháčik Ján ()
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Boháčik Ján: Prague University of Economics and Business, Department of Monetary Theory and Policy, Nam. W. Churchilla 4, 130 67 Prague, Czech Republic

Review of Economic Perspectives, 2022, vol. 22, issue 4, 241-266

Abstract: The interaction of debt and economic performance has been getting more attention over the last few years. However, models making provision for debt are still outnumbered by models completely ignoring it. This paper is the first one to analyze the relationship between household debt (in the form of bank loans) and economic performance (in terms of aggregate income) considering both the impact of wealth and income distribution, and the impact of the MPC distribution under various financial shocks. The outcomes of the model are velocities calculated as ratios of aggregate income to aggregate debt. The paper demonstrates how financial shocks affect the income velocity of money under different distributions of wealth/income and marginal propensity to consume across the population. For this purpose, an original agent-based simulation model with a limited loan supply was designed. Proposed model shocks are shocks to loan demand, loan supply, marginal propensity to consume, macro-prudential regulatory ratios, real estate capital gains, repayment ratios, shocks to the structure of loans provided and to the structure of real estate property transactions. It is shown that the more equal the distributions of wealth/income and of the marginal propensity to consume, the higher is the income velocity of money. From financial shocks, the marginal propensity to consume shock and the shock to the structure of new real estate property purchases have the largest impact on velocity. The shock to regulatory ratios has generally the lowest magnitude.

Keywords: velocity of money; wealth distribution; marginal propensity to consume; financial shocks (search for similar items in EconPapers)
JEL-codes: E41 E51 G51 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:vrs:reoecp:v:22:y:2022:i:4:p:241-266:n:3

DOI: 10.2478/revecp-2022-0011

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