POLHIA

"Monetary, Fiscal and Structural Policies with Heterogeneous Agents"

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 Obiettivo del progetto (Objective)

'It is almost a commonplace that macroeconomic policies, if well conducted, are a stability-enhancing device. By providing a non-inflationary environment, they “keep in order” the backstage of a movie in which the actors -- firms and households – determine long run growth by means of saving/investment decisions. In this view aggregate outcomes can be improved upon by means of microeconomic or structural policies such as labour and product market deregulation, investment in human capital etc. The scope of macroeconomic policies, however, is much wider. For instance, monetary policy affects business fluctuations and growth through financial factors which are certainly no less important than inflation, as the current sub-prime crisis has emphasized. POLHIA aims at exploring the role of macroeconomic policies in this wider sense and the nexus of macroeconomic and microeconomic/structural policies in an heterogeneous agents setting. Modern macroeconomic thinking must in fact go beyond the Representative Agent assumption because agents are indeed different -- in terms of real and financial conditions, labour market status, technical capabilities, expectations, market power etc. -- and this heterogeneity is crucial for macroeconomic outcomes. Monetary and fiscal policies affect in different ways different people just as structural policies do. Structural policies, in turn, can have macroeconomic consequences through externalities. Hence macro and micro policies are strictly intertwined: they can reinforce (or interfere with) each other. The research group will exploit a wide range of tools. At the level of model building the development of macroeconomic frameworks in the New Keynesian tradition will be paralleled and complemented by the extensive use of Agent based models, which are particularly appropriate for the exploration of heterogeneous agents environments. Empirical research will be carried out by means of econometric models and experiments to study, for instance, the formation of expectations. POLHIA aims at providing new insights and useful suggestions for the implementation of both macroeconomic policies and structural policies and for rethinking policy coordination or coherence, which emerges first between monetary and fiscal policies and second between micro and macro policies. The natural candidates to be beneficiaries of this type of analysis, therefore, are policy makers: first and foremost central bankers and Government officials in charge of fiscal and structural policies.'

Introduzione (Teaser)

In-depth studies of fiscal, monetary and related policies in the EU have shed light on our understanding of the complex dynamics and impacts of macroeconomic policies. This will support governments in formulating better economic policies in the near future.

Descrizione progetto (Article)

Healthy macroeconomic policies can keep inflation under control and can stabilise the economy. Good monetary policies can also ensure a more robust business sector and encourage growth, particularly in times of crisis. In this context, the EU-funded project 'Monetary, fiscal and structural policies with heterogeneous agents' (Polhia) investigated new ways to implement key policies in Europe.

After developing theories, software models and databases related to macroeconomic policies, it examined relevant factors such as expectations, fiscal policy, monetary policy, business growth, exchange rate dynamics and technological change. Subsequently, the project recommended building macro-dynamic models in which expectations were not formed according to a unique rational scheme, but as a result of different competing rules. It also showed how the economy tended to organise itself towards a spontaneous order, characterised sometimes by unemployment, unsold production, excess demands and credit rationing.

Interestingly, the project revealed that the EU's stability and growth pact (SGP) was more of a public social norm that countries obeyed to preserve reputation with other EU members. With respect to educational policies, it showed how these combated low productivity and relieved financial constraints at the household level. Other policy-related subjects that were explored involved formulation of economic expectations as well as stabilisation models for fiscal and monetary policies.

In addition, the project investigated the dynamics governing inequality, wage dispersion, labour market features and educational attainment. It collected experimental and empirical evidence regarding expectations and prediction rules, noting their important implications for macro-dynamics and monetary policy decisions. Many valuable findings emerged from these analyses on the economy, particularly in relation to inflation and the stabilising effect of monetary policies.

Polhia's models and results have enabled a much deeper understanding of complex economic systems, contributing significantly to existing literature on financial constraints and economic activity. The results have been disseminated through several international conferences and workshops, the most important of which was the 16th Annual Workshop on Economic Heterogeneous Interacting Agents (WEHIA) held in Italy. The governance of fiscal policy in Europe will surely benefit from this project, as will debates on technical progress, labour market institutions and educational policies.