Appropriate Macroeconomic Policy for Complex Economies

Giovanni Dosi, Giorgio Fagiolo, Mauro Napoletano, Andrea Roventini and Tania Treibich

The Great Recession has shown that income distribution and financial factors, which were constantly downplayed (at best) by mainstream models, appeared to have a fundamental role at least as triggers of the outburst of recessionary dynamics (Stiglitz, 2011). However, both mainstream theory and policy are navigating by sight (Blanchard et al., 2013): for example the impact and the interactions between fiscal, monetary and macro-prudential tools during recessions is still unclear. We contribute to the analysis by means of an agent-based model that can be employed as a laboratory to explore the effects of macroeconomic policies under different credit dynamics and income distribution scenarios. The model, whose direct ancestor is the K+S formalism (Dosi et al., 2010, 2013), bridges Keynesian theories of demand generation, Schumpeterian theories of innovation-driven growth, and a “Minskyan” financial dynamics. It portrays an economy with heterogeneous capital- and consumption-good firms, heterogeneous banks, workers/consumers, a Central Bank and a Government. We carry out several policy exercises. First, we investigate the effect of different regulatory constraints on bank credit supply: tight Basel-like macroprudential policies appear to stabilize the banking sector but at the cost of lower GDP growth and higher volatility due to frequent credit crunch episodes. These effects are even stronger if banks respond to financial fragility by further reducing their credit supply. On the fiscal side, we find that rules limiting public deficits do not improve public finances but they depress aggregate demand, increase unemployment and considerably lengthen recessions’ duration. Finally, higher levels of income inequality are associated to higher economic instability, which in turns significantly increase the need of and the effects of fiscal policies. Instead, with reduced profits, firms are more dependent on debt and the size of the banking sector increases. In that case, higher banking market concentration has adverse effects on the real sector as well as on public finances, and public interventions to bail out banks becomes necessary.