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Harrodian instability in decentralized economies: an agent-based approach

Emanuele Russo ()
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Emanuele Russo: Sant’Anna School of Advanced Studies, EMbeDS and Institute of Economics

Economia Politica: Journal of Analytical and Institutional Economics, 2021, vol. 38, issue 2, No 6, 539-567

Abstract: Abstract Harrodian instability emerges in post-Keynesian models because of the cumulative feedback between demand and investments. This paper presents a novel approach to deal with Harrodian instability. The main contribution is methodological and lies in the different theoretical mechanism adopted to avoid unstable dynamics. While the common approach relies on aggregative investment functions, we emphasize the role of heterogeneity in expectations as a stabilization device. We introduce a small-scale agent-based version of the so-called neo-Kaleckian model. The model features a parsimonious microfoundation of investment decisions. Agents have heterogeneous expectations about demand growth and set their investment expenditures in a decentralized way. Interactions occur through demand externalities. We present results for different scenarios. First, when heterogeneity is ruled out, Harrodian instability is shown to emerge as for the aggregate model. Instead, when heterogeneity is accounted for, a stable dynamics with endogenous fluctuations arises. At the same time, in this second scenario, all the Keynesian implications are preserved, including the presence of macroeconomic paradoxes. Sensitivity analysis confirms the general robustness of our results and the logical consistency of the model.

Keywords: Harrodian instability; Agent-based models; Coordination failures; Heterogeneous expectations (search for similar items in EconPapers)
JEL-codes: E03 E12 E27 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1007/s40888-020-00200-w

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