Credit money in an agent-based macro model

Authors: 
Cornelia Metzig
Abstract: 

The complexity perspective of economics can serve as a framework for arguments from several economic traditions, notably to stock-flow consistency. It is a banality to state that firms and banks do accounting and this impacts their decisions, which is why it is important that accounting present in a comprehensive model. If an economy is analyzed as a complex system, interactions of agents that explain emergent phenomena. Here I present simple and tractable stock-flow consistent model, which does not aggregate to repesentative sectors, and which provides an analytical derivation for the existence of scaling relationships in the context of stochastic processes [11][13][12]. The interactions among agents are monetary transactions, as well as the competition of firms in the goods and labour market. Similar to other macroeconomic models [8][6][4][3], this model can explain a number of stylized facts, which are here distributions of the variables size, age, growth rate, scaling of growth rate variance, leverage and profit margin distribution, as well as bankruptcy statistics. These results reproduce (some only qualitatively) several empirically found distributions from [1][14][7][2][9][10][5] This richness of results and the well-understood mathematical foundation contribute to its validation, as well as the analysis of firm’s leverage life cycles, for which empirical studies exist [15]. Its theoretical analysis shows which are the crucial ingredients for these results, which is also insightful to understand the dynamics of more complex models in the literature, and of course for the dynamics in the real world. Here, the role of stock-flow consistency in this model is analyzed, and it is discussed where common conclusions from stock-flow consistent approach are present in the model, and whether the complexity perspective changes something to it. Since agents base their decisions on the balance sheet, an agent’s stock is a part of the future flow. By providing more liquidity (i.e. by issuing more loans), or charging a lower interest rate, the bank influences future economic activity. In a similar way, economic activity is impacted by the consumption of households. These causalities suggest several reasons for economic fluctations. If a firm’s leverage exceeds a threshold set by the bank, it is declared bankrupt, and their debt is cancelled by the bank, and it exits the system. New, possibly more profitable firms are started at a constant rate, which assure a number of active firms that is approximately constant, and that productivity is constantly growing. Whether or not these bankruptcies create unemployment depends on the ‘potential for growth’, i.e. whether existing firms grow sufficiently fast to absorb the workforce, which in turn depends on their balance sheets.

References
[1] Robert L Axtell. Zipf distribution of us firm sizes. Science, 293(5536), 2001.
[2] Giulio Bottazzi and Angelo Secchi. Explaining the distribution of firm growth rates. The RAND Journal of Economics, 37(2):235–256, 2006.
[3] Silvano Cincotti, Marco Raberto, and Andrea Teglio. Credit money and macroeconomic instability in the agent-based model and simulator eurace. Economics: The Open-Access, Open-Assessment E-Journal, 4, 2010.
[4] Giovanni Dosi, Giorgio Fagiolo, and Andrea Roventini. Schumpeter meeting keynes: A policy-friendly model of endogenous growth and business cycles. Journal of Economic Dynamics and Control, 34(9):1748–1767, 2010.
[5] Giorgio Fagiolo and Alessandra Luzzi. Do liquidity constraints matter in explaining firm size and growth? some evidence from the italian manufacturing industry. Industrial and Corporate Change, 15(1):1–39, 2006.
[6] Domenico Delli Gatti. Macroeconomics from the Bottom-up, volume 1. Springer, 2011.
[7] Stephen Kinsella. The age distribution of firms in ireland, 1961–2009. Department of Economics, University of Limerick, Ireland, 2009.
[8] Stephen Kinsella, Matthias Greiff, and Edward J Nell. Income distribution in a stock-flow consistent model with education and technological change. Eastern Economic Journal, 37(1):134–149, 2011.
[9] Marco Lamieri. Debt maturity structure of italian firms. Available at SSRN 1373752, 2009.
[10] Marco Lamieri and Ilaria Sangalli. Economia e finanza dei distretti industriali, 2011.
[11] Cornelia Metzig and Mirta Gordon. Heterogeneous enterprises in a macroeconomic agent-based model. arXiv preprint arXiv:1211.5575, 2012.
[12] Cornelia Metzig and Mirta B Gordon. Cedit constraints and heterogeneity in a macroeconomic agent-based model. Workshop on Economic Heterogeneous Interacting Agents, 2013.
[13] Cornelia Metzig and Mirta B Gordon. A model for scaling in firms’ size and growth rate distribution. arXiv preprint arXiv:1304.4311, 2013.
[14] Kazumi Okuyama, Misako Takayasu, and Hideki Takayasu. Zipf ’s law in income distribution of companies. Physica A: Statistical Mechanics and its Applications, 269(1):125–131, 1999.
[15] Stewart Thornhill and Raphael Amit. Learning about failure: bankruptcy, firm age, and the resource-based view. Organization Science, 14(5):497–509, 2003.