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Financial shocks and their effects on velocity of money in agent-based model

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  • Boháčik Ján

    (Prague University of Economics and Business, Department of Monetary Theory and Policy, Nam. W. Churchilla 4, 130 67, Prague, Czech Republic)

Abstract

The interaction of debt and economic performance has been getting more attention over the last few years. However, models making provision for debt are still outnumbered by models completely ignoring it. This paper is the first one to analyze the relationship between household debt (in the form of bank loans) and economic performance (in terms of aggregate income) considering both the impact of wealth and income distribution, and the impact of the MPC distribution under various financial shocks. The outcomes of the model are velocities calculated as ratios of aggregate income to aggregate debt. The paper demonstrates how financial shocks affect the income velocity of money under different distributions of wealth/income and marginal propensity to consume across the population. For this purpose, an original agent-based simulation model with a limited loan supply was designed. Proposed model shocks are shocks to loan demand, loan supply, marginal propensity to consume, macro-prudential regulatory ratios, real estate capital gains, repayment ratios, shocks to the structure of loans provided and to the structure of real estate property transactions. It is shown that the more equal the distributions of wealth/income and of the marginal propensity to consume, the higher is the income velocity of money. From financial shocks, the marginal propensity to consume shock and the shock to the structure of new real estate property purchases have the largest impact on velocity. The shock to regulatory ratios has generally the lowest magnitude.

Suggested Citation

  • Boháčik Ján, 2022. "Financial shocks and their effects on velocity of money in agent-based model," Review of Economic Perspectives, Sciendo, vol. 22(4), pages 241-266, December.
    • Handle: RePEc:vrs:reoecp:v:22:y:2022:i:4:p:241-266:n:3
    DOI: 10.2478/revecp-2022-0011
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    References listed on IDEAS

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    More about this item

    Keywords

    velocity of money; wealth distribution; marginal propensity to consume; financial shocks;
    All these keywords.

    JEL classification:

    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth

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