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Eurace Open: An agent-based multi-country model

Marco Petrovic (), Bulent Ozel (), Andrea Teglio, Marco Raberto () and Silvano Cincotti ()
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Marco Petrovic: LEE and Department of Economics, Universitat Jaume I, Castellón, Spain
Bulent Ozel: LEE and Department of Economics, Universitat Jaume I, Castellón, Spain

No 2017/09, Working Papers from Economics Department, Universitat Jaume I, Castellón (Spain)

Abstract: The global economic and financial crises, whose genesis is often associated with the collapse of Lehman Brothers, had a pervasive impact on all the leading economies in the world. The place where it might have been more disruptive has been the European Union (EU), which revealed a structural fragility and inadequacy to tackle some of the main challenges ahead. In this paper we mainly focus on migration challenges, further integrations of a monetary union, spatial inequality, and sovereign debt crisis. To address the relevant issues, we use a multi-country model that is an extension of the Eurace agent-based model. We design a flexible modeling framework that can host many different countries. In this paper the model hosts four countries. It is designed as a monetary union of two countries with international labor market, international trade, and international financial market, and another two independent countries that are always identical to the union members and serve as control states. We found that when countries are identical it is always beneficial to join the union, however an excess of workers mobility can weaken the performance of the union and even create persistent inequality between countries. Moreover, the monetary policy of the union central bank can deteriorate if the difference between countries growth and in general it tends to overshoot the inflation target. When the two countries differ in productivity, the union on aggregate performs again better than the sum of the isolated countries counterparts. However, taking into account the welfare in both countries of the union, it is not always convenient to form the union. The performance of the union is strongly affected by the level of labor market frictions and the size of the productivity gap among countries. The real sovereign debt per capita in the union increases with low mobility frictions and high productivity gap. Stronger fiscal integration (fiscal transfers) reduces inequality between countries, allowing the low productivity country and, hence, the total union to sustain even with a higher mobility of workers.

Keywords: Agent-based multi-country model; migration; integration; monetary union; monetary policy; fiscal policy (search for similar items in EconPapers)
JEL-codes: E02 E2 E7 F22 F4 F45 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-eec and nep-mac
Date: 2017
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