We present a model of an artificial financial economy, populated by different types of agents, i.e., households, firms, a commercial bank, a central bank and a government, which interact through a multi-asset financial market. The distinctive feature of the study is the endogenous modeling of financial decisions of agents. In particular, households receive an exogenous labor income and decide how much to spend and how much to save according to a precautionary saving motive. They can either invest their savings in the asset market or can put it in a savings account. Beliefs about asset returns are subjective. In particular, financial preferences are modeled according to prospect theory and depend on psychological features. These behavioral features give rise to bubble and bursts in the asset market. Each firm is subject to an exogenous stochastic process for the return on its physical assets (ROA) which are financed both by equity and debt. The equity is divided into shares among households and traded in the financial market, the debt is a loan provided by the commercial bank. The ROA sets the firm’s earnings before taxes and interest payments. Each firm then decides dividends and new investments in physical assets considering the difference between ROA and average cost of capital in the financial market. The commercial bank provides loans to firms according to Basel II requirements and holds a buffer account at the central bank. The lending rate depends on the central bank policy rate according to the Klein-Monti model. The government runs a financial budget: income is given by taxation of firms and commercial bank earnings; expenditures depend on unemployment benefits and the interest rates on government debt. The government may issue both short-term and long-term bonds in order to finance the budget deficit.

The goal of both the government and the central bank policies is the pursuit of low volatility in the asset market and of long-run growth in the economy by means of accumulation of physical assets by firms. The aim of this paper is to study how these policy objectives can be better achieved by means of proper fiscal and monetary policy measures in an agent-based model of a financial economy.

1. FULLTEXT: Monetary and fiscal policy design in an agent-based model of a financial economy, PDF document, version 1.2, 0.2MB

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