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In-Depth Information
3.1 Baseline Scenario
Simulation results show that endogenous business cycles emerge as a conse-
quence of the interaction between real and financial factors. When firms' profits
are improving, they try to expand the production and, if banks extend more
credit, this results in more employment; the decrease of the unemployment rate
leads to the rise of wages that, on the one hand, increases the aggregate de-
mand, while on the other hand reduces firms' profits, and this may cause the
inversion of the business cycle. Indeed, there is a significant cross-correlation
between the unemployment rate and the firms' profit rate. First of all, there is a
high positive correlation at lag 0: the profit rate is high when unemployment is
high given that firms save on production costs (e.g., wage bill) but, at the same
time, the aggregate demand does not decrease proportionally, because of public
workers' expenditure and consumption due to wealth, thus firms can sell their
commodities (including inventories) in the goods market. However, the presence
of unemployed people, the tendency of wages to decrease due to the high unem-
ployment rate, and the reduction of households' wealth, cause the fall of next
period aggregate demand that, in turn, reduces firms' profits. Indeed, there is a
negative correlation at lag +1. Instead, the negative correlation at lag -1 means
that increasing profits boost the expansion of the economy and then a fall of the
unemployment rate follows. Then, there is a dynamic relation between unem-
ployment and the profit rate underlying the “real” economy, which gives rise to
business cycle fluctuations that, in turn, are amplified by a financial accelerator
mechanism. Business fluctuations are mitigated by the government, which acts
as an acyclical sector, reducing output volatility through the stabilisation of the
aggregate demand.
In some cases, differently from the usual business cycle mechanism, the fall
of wages due to the increase of unemployment does not reverse the cycle, but
generates a lack of aggregate demand that amplifies the recession in a vicious
circle: indeed, the fall of purchasing power prevents firms to sell commodities,
then firms decrease production, unemployment continues to rise, and the reces-
sion further deteriorates. In these cases, the system may remain trapped in a
large unemployment crisis.
3.2 Heterogeneous Consumption Behaviour
In this subsection, we compare the result of the baseline model, obtained with
a parameter
c
3
= 1 in equation 1, with the results of the simulations in which
c
3
=0
.
5. In this way, we try to address the inequality topic in a symplified
framework in which all households have the same skills and they all works in
an economy with homogeneous goods. Thus, labour income does not vary much
across households and capital income is distributed to households proportionally
to their share (which in turn depends on households' wealth). Moreover, all
households have a similar initial wealth. Indeed, in the baseline case (
c
3
=1),
we obtain a wealth distribution that is negatively skewed, while in the real world
it is highly positively skewed.
