The Future of Agent-Based Modeling

In this paper, I elaborate on the role of agent-based (AB) modeling for macroeconomic research. My main tenet is that the full potential of the AB approach has not been realized yet. This potential lies in the modular nature of the models, which is bought by abandoning the straitjacket of rational expectations and embracing an evolutionary perspective. I envisage the foundation of a Modular Macroeconomic Science, where new models with heterogeneous interacting agents, endowed with partial information and limited computational ability, can be created by recombining and extending existing models in a unified computational framework

The ‘Keynesian Moment’ in Policymaking, the Perils Ahead, and a Flow-of-Funds Interpretation of Fiscal Policy

With the global crisis, the policy stance around the world has been shaken by massive government and central bank efforts to prevent the meltdown of markets, banks, and the economy. Fiscal packages, in varied sizes, have been adopted throughout the world after years of proclaimed fiscal containment. This change in policy regime, though dubbed the 'Keynesian moment,' is a 'short-run fix' that reflects temporary acceptance of fiscal deficits at a time of political emergency, and contrasts with John Maynard Keynes's long-run policy propositions. More important, it is doomed to be ineffective if the degree of tolerance of fiscal deficits is too low for full employment. Keynes's view that outside the gold standard fiscal policies face real, not financial, constraints is illustrated by means of a simple flow-of-funds model. This shows that government deficits do not take financial resources from the private sector, and that demand for net financial savings by the private sector can be met by a rising trade surplus at the cost of reduced consumption, or by a rising government deficit financed by the monopoly supply of central bank credit. Fiscal deficits can thus be considered functional to the objective of supplying the private sector with a provision of financial wealth sufficient to restore demand. By contrast, tax hikes and/or spending cuts aimed at reducing the public deficit lower the available savings of the private sector, and, if adopted too soon, will force the adjustment by way of a reduction of demand and standard of living. This notion, however, is not applicable to the euro area, where constraints have been deliberately created that limit public deficits and the supply of central bank credit, thus introducing national solvency risks. This is a crucial flaw in the institutional structure of Euroland, where monetary sovereignty has been removed from all existing fiscal authorities. Absent a reassessment of its design, the euro area is facing a deflationary tendency that may further erode the economic welfare of the region

Determinants of Carry Trades in Central and Eastern Europe

In this paper, I analyze determinants of carry trade returns in Central and Eastern Europe (CEE). I show that carry trades to CEE were lucrative due to interest rate spreads between the funding and investment currency from 2004 to 2006. They became unprofitable when liquidity risk and exchange rate volatility increased after 2007. The analysis suggests that the exchange rate regime of the CEE economy matters for carry trade returns. Overall, exchange rate stabilization, particularly via managed floats, seems to allow for the highest profit opportunities

The Global Financial Crisis and a New Capitalism?

The 2008 global financial crisis was the consequence of the process (1) of financialization, or the creation of massive fictitious financial wealth, that began in the 1980s,; and (2) the hegemony of a reactionary ideology-namely, neoliberalism-based on self-regulated and efficient markets. Although laissez-faire capitalism is intrinsically unstable, the lessons of the 1929 stock market crash of 1929 and the Great Depression of the 1930s were transformed into theories and institutions or regulations that led to the '30 glorious years of capitalism' (1948-77) and that could have helped avoid a financial crisis as profound as the present one. But it did not, because a coalition of rentiers and 'financists' achieved hegemony and, while deregulating the existing financial operations, refused to regulate the financial innovations that made these markets even riskier. Neoclassical economics played the role of a meta-ideology as it legitimized, mathematically and 'scientifically,' neoliberal ideology and deregulation. From this crisis a new democratic capitalist system will emerge, though its character is difficult to predict. It will not be financialized, but the glory years' tendencies toward a global and knowledge-based capitalism in which professionals have more say than rentier capitalists, as well as the tendency to improve democracy by making it more social and participative, will be resumed