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Outside the corridor: fiscal multipliers and business cycles into an agent-based model with liquidity constraints

Author

Listed:
  • Mauro Napoletano

    (OFCE - Observatoire français des conjonctures économiques (Sciences Po) - Sciences Po - Sciences Po)

  • Jean-Luc Gaffard

    (OFCE - Observatoire français des conjonctures économiques (Sciences Po) - Sciences Po - Sciences Po)

  • Andrea Roventini
Abstract
We build an agent-based model to study how fiscal multipliers can change over the business cycle. Our approach considers the economy as a complex evolving system. In that, fiscal state-dependent multipliers are emergent disequilibrium phenomenon stemming from the interaction among an ecology of heterogeneous agents. We study fiscal multipliers in response to dfferent microeconomic shocks hitting the economy. We show that defficit-spending fiscal policy dampens the effect of a shock and lowers its persistence. Moreover, we show that the size and dynamics of the fiscal multi- plier is inversely related to the evolution of credit rationing in the aftermath of the shock. We also investigate the effects of two different balanced budget rules. In the first type of such experiments, government expenditure is constrained to be equal to tax revenues of each period. In the second one the tax rate is eventually raised to balance a given level of government expenditure. We show that fiscal multipliers are very low with both balanced-budget rules. Finally, we show that fiscal multipliers are higher into more leveraged economies.

Suggested Citation

  • Mauro Napoletano & Jean-Luc Gaffard & Andrea Roventini, 2014. "Outside the corridor: fiscal multipliers and business cycles into an agent-based model with liquidity constraints," SciencePo Working papers Main hal-03460253, HAL.
    • Handle: RePEc:hal:spmain:hal-03460253
    Note: View the original document on HAL open archive server: https://hal-sciencespo.archives-ouvertes.fr/hal-03460253
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    1. Olivier J. Blanchard & Daniel Leigh, 2013. "Growth Forecast Errors and Fiscal Multipliers," American Economic Review, American Economic Association, vol. 103(3), pages 117-120, May.
    2. Gauti B. Eggertsson & Paul Krugman, 2012. "Debt, Deleveraging, and the Liquidity Trap: A Fisher-Minsky-Koo Approach," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 127(3), pages 1469-1513.
    3. Bachmann, Rüdiger & Sims, Eric R., 2012. "Confidence and the transmission of government spending shocks," Journal of Monetary Economics, Elsevier, vol. 59(3), pages 235-249.
    4. Gatti, Domenico Delli & Guilmi, Corrado Di & Gaffeo, Edoardo & Giulioni, Gianfranco & Gallegati, Mauro & Palestrini, Antonio, 2005. "A new approach to business fluctuations: heterogeneous interacting agents, scaling laws and financial fragility," Journal of Economic Behavior & Organization, Elsevier, vol. 56(4), pages 489-512, April.
    5. Dosi, Giovanni & Fagiolo, Giorgio & Napoletano, Mauro & Roventini, Andrea, 2013. "Income distribution, credit and fiscal policies in an agent-based Keynesian model," Journal of Economic Dynamics and Control, Elsevier, vol. 37(8), pages 1598-1625.
    6. Alan J. Auerbach & Yuriy Gorodnichenko, 2012. "Measuring the Output Responses to Fiscal Policy," American Economic Journal: Economic Policy, American Economic Association, vol. 4(2), pages 1-27, May.
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    More about this item

    Keywords

    Keynesian economics; Fiscal Multipliers; Corridor E;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques

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