Budgetary rigour with stimulus in lean times: Policy advices from an agent-based model

Abstract

The 2008 financial crisis, and the subsequent global recession, triggered a wide-spread economic and political debate on the proper policy combination to deal with the crisis and to prevent similar ones in the future. Probably, the main dispute has been around the use of fiscal instruments in order to foster growth while keeping public debt under control. The European Union, for instance, endorsed “austerity” measures for fiscal consolidation but has been sharply criticized by several scholars. This paper aims at contributing to the current debate by presenting the outcomes of a computational study performed with the Eurace agent-based model. We set up an experiment with two base policy scenarios, i.e., stability and growth pact and fiscal compact, incrementally enriching them with complementary policies which relax fiscal rigidity and introduce quantitative easing. Results show that budgetary rigour performs well if and only if some mechanisms of fiscal relaxation and monetary accommodation are considered during bad times; thus confirming in a richer and more realistic model setting the fundamental tenet of Keynesian economics about the importance of sustaining aggregate demand during recessions.