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that is the
baseline
scenario, and one with
c
3
=0
.
5. Accordingly, when
c
3
=1
we have the following consumption function:
c
ht
=
c
1
·
w
ht
+
c
2
·
A
ht
Instead, if
c
3
=0
.
5 the consumption function is given by:
c
ht
=
c
1
·
w
ht
+
c
2
A
ht
Moreover, if the amount
c
ht
is smaller than the average price of one good
p
then
c
ht
=
min
(
p,w
ht
+
A
ht
).
Given the number of hired workers,
n
ft
, firms produce consumption goods:
y
ft
=
φ
·
n
ft
(2)
where
φ
1 is a productivity parameter (equal for all firms and time-invariant).
Firms try to sell their current period production and previous period inven-
tories. The selling price increases if in the previous period the firm managed to
sell all the output, while it reduces if it had positive inventories. Moreover, the
minimum price at which the firm want to sell its output is set such that it is at
least equal to the average cost of production, that is
ex-ante
profits are at worst
equal to zero.
≥
2.4 Deposit Market
Banks and households interact in the deposit market. Banks represent the de-
mand side and households are on the supply side. Banks offer an interest rate
on deposits according to their funds requirement: if a bank exhausts the credit
supply by lending to private firms or government then it decides to increase
the interest rate paid on deposits, so to attract new depositors, and viceversa.
However, the interest rate on deposits can increase till a maximum given by
the policy rate, which is both the rate at which banks could refinance from the
central bank and the rate paid by the government on public bonds.
Households decide their savings to be deposited in banks as the desired sav-
ings plus the residual cash at the end of the interaction in the consumption
market. Moreover, they set the minimum interest rate they want to obtain on
bank deposits as follows: a household that in the previous period found a bank
paying an interest rate higher or equal to the desired one decides to ask for a
higher remuneration. In the opposite case, she did not find a bank satisfying her
requirements, thus she kept her money in cash and now she asks for a lower rate.
We assume that a household deposits all the available money in a single bank
that offers an adequate interest rate.
3 Simulations
We explore the dynamics of the model by means of computer simulations. We
refer to [9] for the details about the parameter setting, the initial conditions,
and the results of the baseline model that we now sum up.
