The Fiscal Cost of Financial Instability
-
Carl Chiarella
and
Corrado Di Guilmi
Abstract
This paper presents an agent based model that investigates the possible outcomes of different fiscal and regulatory policies in a financially fragile economy. We analyse the consequences of the attempt by the government to counteract a downturn when it ignores the debt dynamics as modelled by Fisher and Minsky. In particular, we formulate an educated guess about the burden that the government and the taxpayer must bear when a bubble bursts, and its relationship with the extent of government intervention and the taxation system. We also evaluate the outcomes of possible alternatives or complementary regulatory policies. We model four different scenarios treating separately a tax on profits and a tax on private wealth and, for both of them, we specify two cases depending on whether the financial system is able to autonomously generate liquidity. Therefore, we can assess the effect of endogenous money and endogenous credit on the different stabilization policies.
©2012 Walter de Gruyter GmbH & Co. KG, Berlin/Boston
Articles in the same Issue
- Article
- Introduction to the Current Issue
- An Experimental Study on Expectations and Learning in Overlapping Generations Models
- Asset Pricing with Heterogeneous Investment Horizons
- The Fiscal Cost of Financial Instability
- Microfounded Animal Spirits in the New Macroeconomic Consensus
- Identification of Interaction Effects in Survey Expectations: A Cautionary Note
- Heterogeneous Learning Dynamics and Speed of Convergence
- Effects of Inflation Expectations on Macroeconomic Dynamics: Extrapolative Versus Regressive Expectations
Articles in the same Issue
- Article
- Introduction to the Current Issue
- An Experimental Study on Expectations and Learning in Overlapping Generations Models
- Asset Pricing with Heterogeneous Investment Horizons
- The Fiscal Cost of Financial Instability
- Microfounded Animal Spirits in the New Macroeconomic Consensus
- Identification of Interaction Effects in Survey Expectations: A Cautionary Note
- Heterogeneous Learning Dynamics and Speed of Convergence
- Effects of Inflation Expectations on Macroeconomic Dynamics: Extrapolative Versus Regressive Expectations
