The financial transmission of shocks in a simple hybrid macroeconomic agent based model

Abstract

Employing the methodology described in Assenza and Delli Gatti 2013 (AD2013 hereafter), in the present paper we build a macro multi-agent model described by a IS schedule, a Taylor Rule (TR) and a Phillips curve (AS curve). At the micro level we consider a corporate sector populated by heterogeneous firms in terms of financial conditions (net worth) that decide investment. Hence, aggregate investment is a function of the interest rate augmented by an aggregate or average External Finance Premium (EFP), which in turn is a function of the moments of the distribution of firms’ net worth. The moments of the distribution of firms’ net worth, therefore, are (predetermined) state variables of the aggregate variables. Moreover, individual net worth is affected by the interest rate: the higher the interest rate, the lower realized profits and the lower net worth. A two-way feed back between the macroeconomic and the agent based model is at work. We want to study how do macroeconomic shocks propagates is such an economy. For each shock we will determine the change generated on output gap assuming an unchanged distribution of the net worth (first round effect) and the change in output gap due to a change in the distribution of net worth induced by the aggregate shock (second round effect). Therefore, the net effect on output gap will depend on the sign and the magnitude of these two effects

Keywords

Reference

Tiziana Assenza, and D. Delli Gatti, “The financial transmission of shocks in a simple hybrid macroeconomic agent based model”, Journal of Evolutionary Economics, vol. 29, n. 1, March 2019, pp. 265–297.