Demand, credit and macroeconomic dynamics. A micro simulation model

We develop a micro simulation model for the macroeconomic business cycle. Our model is based on three main ideas. First, we want to specify how macroeconomic coordination is achieved without a dominating influence of price mechanisms. Second, we want to incorporate the stock-flow-consistent (SFC) approach that has become popular in post-Keynesian macroeconomics. Existing macroeconomic models often pay no attention to how short-run outcomes (in the form of surpluses or deficits on the account balances of individual agents, or groups of agents) accumulate into long-run debt. The SFC approach models such deficits and surpluses, and their accumulation, explicitly, and imposes a logic in which these long-run balances co-determine the macroeconomic coordination outcome. Third, we want to allow for bankruptcies as a major mechanism in the business cycle. In reality, bankruptcies are a way in which long-run balances get adjusted, but most often the SFC models do not allow bankruptcies as a way in which long-run balances adjust. In our model, bankruptcies arise because agents do not adapt their behavior quickly enough as debt, or assets, accumulate. This is parametrized, so that bankruptcies can disappear in the simulation runs, which enables us to compare the nature of business cycles with and without bankruptcies. Our results show a clear business cycle that is driven by accumulation of financial assets and the effects this has on the real economy. By changing some of the key parameters, we show how the nature of the business cycle changes as a result of changes in the assumed behavior of agents.