Fiscal policy and business cycle characteristics in a heterogeneous agent macro model

Abstract

This paper explores the macroeconomic implications of changing fiscal policy in a Heterogeneous Interacting Agent (“HIA”) model. The key contributions to the existing HIA complex adaptive trivial system (“CATS”) literature include the addition of a progressive income tax structure, an expanded role for redistribution, and a stylized reactive government sector. In certain specifications deficit financed tax cuts are shown to effectively shorten recessions, while deficit financed spending stimulus is able to lengthen recoveries. Alternative specifications provide ambiguous support for generalizing the effectiveness of these policy treatments. Robustness checks support the general findings that increased redistribution towards the unemployed results in higher unemployment rates, greater inequality, and shorter contractions.