Eugenio Caverzasi

Agent Based-Stock Flow Consistent Macroeconomics: Towards a Benchmark Model

The global financial crisis has forced standard macroeconomics to re-examine the plausibility of its assumptions and the adequacy of the policy prescriptions flowing from those assumptions. We believe a renewal of macroeconomic thinking and macroeconomic modeling is possible by recognizing that our economies should be analyzed as complex adaptive systems. A coherent and exhaustive representation of the inter-linkages between the real and financial sides of the economy is vital as well. We propose a macroeconomic framework based on a novel combination of the Agent Based and Stock Flow Consistent approaches. This paper presents a benchmark model for this innovative approach. Our model depicts an economy with capital and credit in which different types of agents locally interact on different markets. We provide a detailed representation of individual agents’ balance sheets, ensuring the model accounting consistency at the micro, meso, and macro levels. We analyze the properties of our simulated economy under different configurations of agent heuristics, focusing in particular on the role of credit and investment. We explain in detail the logic followed to calibrate and validate the model. Results show that our benchmark model is able to reproduce many stylized facts observed in real world, thus representing a good starting point to test -- in the next works -- different economic policies and institutional setups. Finally, the relatively simple and flexible structure of the model opens up many possibilities for development of the framework along different lines, thus providing a fertile soil for new applications.

Stock-Flow Consistent Modeling Through the Ages

The aim of the paper is to provide an overview of the current stock-flow consistent (SFC) literature. Indeed, we feel the SFC approach has recently led to a blossoming literature, requiring a new summary after the work of Dos Santos (2006) and, above all, after the publication of the main reference work on the methodology, Godley and Lavoies Stock-flow Consistent Approach (2007). The paper is developed along the following lines. First, a brief historical analysis investigates the roots of this class of models that can be traced as far back as 1949 and the work of Copeland. Second, the competing points of view regarding some of its main controversial aspects are underlined and used to classify the different methodological approaches followed in using these models. Namely, we discuss (1) how the models are solved, (2) the treatment of time and its implication, and (3) the need-or not-of microfoundations. These results are then used in the third section of the paper to develop a bifocal perspective, which allows us to divide the literature reviewed according to both its subject and the methodology. We explore various topics such as financialization, exchange rate modeling, policy implication, the need for a common framework within the post-Keynesian literature, and the empirical use of SFC models. Finally, the conclusions present some hypotheses (and wishes) over the possible lines of development of the stock-flow consistent models.

Decentralized Interacting Macroeconomics and the Agent-Based “Modellaccio”

Abstract The chapter presents an excursus on the Agent-Based (AB) modeling approach in the field of macroeconomics, with a particular focus on the line of research pushed forward over the last decade by the AB research group at the Marche Polytechnic University of Ancona, to which the authors of this chapter and most of the contributors to the present book belong. The first part of the chapter provides an introduction to the methodology, summarizing its historical and theoretical roots and sketching out its main features. An overview of the recent AB macroeconomic literature is then provided, presenting some of the main “families” of models that have contributed to its development. The second part focuses on the most recent contributions in the field provided by the Ancona research group, which are the result of a research agenda aiming at combining the AB bottom-up approach to macroeconomics with the Post-Keynesian Stock Flow Consistent (SFC) modeling framework [59] . These efforts culminated into the release of a brand-new simulation tool suite in Java (the Java Macro Agent-Based (JMAB) platform), explicitly designed for AB-SFC models, and of a benchmark AB-SFC model [17] , dubbed “the AB Modellaccio.” In describing these two contributions and their successive refinements, we deepen several important theoretical and technical aspects of the AB-SFC modeling approach, and we argue that this novel framework has the potential to set an alternative paradigm in macromodeling. In the conclusions, we reflect on the current strengths and limits of the AB and SFC methodologies, highlighting the main challenges to be addressed in the next future.

Long Term Impacts of Bank Behavior on Financial Stability. An Agent Based Modeling Approach

This paper presents an agent-based model aiming to shed light on the potential destabilizing effects of bank behavior. Our work takes its motivation from the effects of the financial crisis which erupted in 2007 in the US. It draws on the Financial Instability Hypothesis by Hyman P. Minsky, and on the Agent Based macro modeling literature (Delli Gatti et al. 2010, Riccetti et. al 2013) to model a simplified economy in which heterogeneous banks and firms interact on game theoretic rules. Simulation results suggest that aggregate financial instability may emerge as the outcome of banks’ attempt to increase their profit or market share through their pricing strategies. A further finding from the model is the need for banks to take into account time consistency when issuing credit in order to protect the financial stability of the system.

Minsky and the Subprime Mortgage Crisis: The Financial Instability Hypothesis in the Era of Financialization

The aim of this paper is to develop a structural explanation of the subprime mortgage crisis, grounded on the combination of two apparently incompatible financial theories: the financial instability hypothesis by Hyman P. Minsky and the theory of capital market inflation by Jan Toporowski. Our thesis is that, once the evolution of the financial market is taken into account, the financial Keynesianism of Minsky is still a valid framework to understand the events leading to the crisis.

The Missing Macro Link

This paper addresses the critique of the aggregational problem attached to the financial instability hypothesis of Hyman Minsky. The core of this critique is based on the Kaleckian analytical framework and, in very broad terms, states that the expenditure of i¬ rms for investment is at the same time a source of income for the i¬ rms producing capital goods. Hence, even if investments are debt i¬ nanced, as in Minskys analysis, the overall level of indebtedness of the i¬ rm sector remains unchanged, since the debts of investing i¬ rms are balanced by the income of capital goods-producing i¬ rms. According to the critics, Minsky incurs a fallacy of composition when he does not take this dynamic into account when applying his micro analysis of investment at the macro level. The aim of this paper is to clarify the consequences of debt-i¬ nanced investments over the i¬ nancial structure of an aggregate economy. Starting from the works of Michal Kalecki and Josef Steindl, we developed a stock-flow consistent analysis of a highly simplii¬ ed economy under four different i¬ nancial regimes: (1) debt-i¬ nanced with no distributed profits, (2) debt-i¬ nanced with distributed proi¬ ts, (3) internally i¬ nanced with no distributed proi¬ ts, and (4) internally i¬ nanced with distributed proi¬ ts. The results of our investigation show that debt-i¬ nanced investments do not lead to a worsening of the i¬ nancial position of the i¬ rm sector only if specific assumptions are taken into account.