Financial Markets imperfections, heterogeneity and growth

This paper offers a model of growth with heterogeneous agents in which, due to asymmetric information, financial markets do not work properly. In such a world, the Modigliani-Miller theorem fails to hold, a financial hierarchy emerges and ‘how to finance’ the engine of growth – in our case represented by uncertain endeavours in R&D - matters. In turn, heterogeneity means that agents lack sufficient information on the behaviour adopted by the others, forcing them to make use of naive rules in forming expectations and in calculating their probability of bankruptcy. The basic properties of the model are explored via simulations. In particular, it is possible to appreciate how a worsening of financial conditions (e.g. an increase of the contractual interest rate on loans or of the probability of bankruptcy) affects negatively the long-run average rate of growth

Fiscal and monetary policy, unfortunate events, and the SGP arithmetics - Evidence from a growth-gaps model

The recent revision (March 2005) of the Stability and Growth Pact (SGP) has confirmed the 3% deficit/GDP ratio as the pillar of the excessive deficits procedure envisaged by the Maastricht Treaty for member countries of the EMU. Since the deficit/GDP ceiling is still in place, research on its implications for fiscal discipline and macroeconomic stabilization has to be pushed further. We argue that the agenda largely involves empirical matters. In particular, this paper presents an econometric estimate and simulations of a macroeconomic model of Italy and Germany aimed at addressing three issues. First, monetary and fiscal rules intercations are explictly modelled and examined in dynamic setting. Second, consistently with common perception and the new formulation of the SGP, the business cycle and the responses of policy variables are cast in terms of growth gaps, not gaps in levels, with respect to potential. Third, budgetary components (primary expenditure and total tax revenue) are examined as separate fiscal rules, which allows us to track the reaction of the fiscal stance to growth shocks more precisely, to point out several pitfalls in current measures of fiscal ratios to GDP, and suggest more accurate assessment of fiscal stances.Fiscal policy, Stability and Growth Pact

Power Law Scaling in the World Income Distribution

We show that over the period 1960-1997, the range comprised between the 30th and the 85th percentiles of the world income distribution expressed in terms of GDP per capita invariably scales down as a Pareto distribution. Furthermore, the time path of the power law exponent displays a negatively sloped trend. Our findings suggest that the cross-country average growth process appears to be scale invariant but for countries in the tails of the world income distribution, and that the relative volatility of smaller countries' growth processes have increased over time.Growth

Demand Distribution Dynamics in Creative Industries: the Market for Books in Italy

We studied the distribution dynamics of the demand for books in Italy. We found that for each of the three broad sub-markets into which the book publishing industry can be classified - Italian novels, foreign novels and non-fiction - sales over a three-year sample can be adequately fitted by a power law distribution. Our results can be plausibly interpreted in terms of a model of interactions among buyers exchanging information on the books they buy.Book publishing industry; Information transmission; Power law distribution

A look at the relationship between industrial dynamics and aggregate fluctuations

The firmly established evidence of right-skewness of the firms’ size distribution is generally modelled recurring to some variant of the Gibrat’s Law of Proportional Effects. In spite of its empirical success, this approach has been harshly criticized on a theoretical ground due to its lack of economic contents and its unpleasant long-run implications. In this chapter we show that a right-skewed firms’ size distribution, with its upper tail scaling down as a power law, arises naturally from a simple choice-theoretic model based on financial market imperfections and a wage setting relationship. Our results rest on a multi-agent generalization of the prey-predator model, firstly introduced into economics by Richard Goodwin forty years ago.Firm size; Prey-predator model; Business Fluctuations

Demand Distribution Dynamics in Creative Industries: the Market for Books in Italy

We study the distribution dynamics of the demand for books in Italy. We find that for each of three broad sub-markets in which the book publishing industry can be classified Italian novels, foreign novels and essays sales over a three-year sample can be adequately fitted by a power law distribution. Our results can be plausibly interpreted in terms of a model of interactions among buyers exchanging information on the books they buy.Book publishing industry; Information transmission; Power law distribution.

Reference-dependent preferences and the transmission of monetary policy

This paper proposes a novel explanation of the vast empirical evidence showing that output and prices react asymmetrically to monetary policy innovations over contractions and expansions in the business cycle. We use VAR techniques to show that monetary policy exerts stronger effects on the U.S. GDP during contractionary phases, as compared to expansionary ones. As to prices, their response is not statistically different across different cyclical stages. We show that these facts are consistent with a New Neoclassical Synthesis model based on the assumption that households. utility partly depends on deviations of their consumption from a reference level below which aversion to loss is displayed. In line with the theory developed by Kahneman and Tversky (1979), losses in consumption utility loom larger than gains. This implies state-dependent degrees of real rigidity and elasticity of intertemporal substitution in consumption that generate competing effects on the responses of output and inflation following a monetary innovation. The key predictions of the model are in line with the data. We then explore the state-dependent trade-o¤ between inflation and output stabilization that naturally arises in this context. Greater elasticity of inflation to real activity during expansionary stages of the cycle promotes a stronger degree of policy activism in the response to the expected rate of inflation under discretion, compared to what is otherwise prescribed during contractions.

Adaptive microfoundations for emergent macroeconomics

In this paper we present the basics of a research program aimed at providing microfoundations to macroeconomic theory on the basis of computational agentbased adaptive descriptions of individual behavior. To exemplify our proposal, a simple prototype model of decentralized multi-market transactions is offered. We show that a very simple agent-based computational laboratory can challenge more structured dynamic stochastic general equilibrium models in mimicking comovements over the business cycle.Microfoundations of macroeconomics, Agent-based economics, Adaptive behavior