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Fiscal and monetary policies in complex evolving economies

Mauro Napoletano, Andrea Roventini (), Giovanni Dosi (), Giorgio Fagiolo () and Tania Treibich ()
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Mauro Napoletano: OFCE

No 2014-05, Sciences Po publications from Sciences Po

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 forms, 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 magnified by conservative monetary policies focused on ination stabilisation 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 (search for similar items in EconPapers)
JEL-codes: C63 E32 E6 E52 G10 G21 O4 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-cmp, nep-mac, nep-mon and nep-pbe
Date: 2014-02
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Related works:
Working Paper: Fiscal and monetary policies in complex evolving economies (2014) Downloads
Working Paper: Fiscal and Monetary Policies in Complex Evolving Economies (2014) Downloads
Working Paper: Fiscal and Monetary Policies in Complex Evolving Economies (2014) Downloads
Working Paper: Fiscal and Monetary Policies in Complex Evolving Economies (2014) Downloads
Working Paper: Fiscal and monetary policies in complex evolving economies (2014) Downloads
Working Paper: Fiscal and Monetary Policies in Complex Evolving Economies (2014) Downloads
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