An important question in economics is to explain the link between the real and financial spheres of the economy. In reality, macroeconomic and financial variables are correlated along the business cycle. Most existing models, however, are unable to convincingly explain this correlation

This paper documents recent work on this topic carried out within an ongoing effort to construct an agent-based model of the European economy, the FP6 project EURACE. While most of the existing agent-based models cover only a single industry, one restricted geographical area, or a unique market, and involve relatively small populations of agents, EURACE aims at creating a complete, closed integrated agent-based model of the European economy. The model has an explicit spatial structure mimicking the regional statistical units used by Eurostat. It includes regional artificial markets for real commodities (that is, consumption goods, investment goods and labor), and markets for financial assets (such as loans, bonds and stocks).

In this paper, we present a model of financial policy decisions by the firm (that is, financial resources and payout policy) that provides the link between the economic fundamentals and the financial variables. The behavioral rules are directly inspired by those used in reality. We use this model to interconnect two EURACE modules, one describing the production side and the other describing the financial markets. Simulation results and their interpretation are presented.

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