Harrodian instability in decentralized economies: an agent-based approach
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Harrodian instability in decentralized economies: an agent‑based approach Emanuele Russo1 Received: 29 March 2019 / Accepted: 22 September 2020 © Springer Nature Switzerland AG 2020
Abstract Harrodian instability emerges in post-Keynesian models because of the cumulative feedback between demand and investments. This paper presents a novel approach to deal with Harrodian instability. The main contribution is methodological and lies in the different theoretical mechanism adopted to avoid unstable dynamics. While the common approach relies on aggregative investment functions, we emphasize the role of heterogeneity in expectations as a stabilization device. We introduce a small-scale agent-based version of the so-called neo-Kaleckian model. The model features a parsimonious microfoundation of investment decisions. Agents have heterogeneous expectations about demand growth and set their investment expenditures in a decentralized way. Interactions occur through demand externalities. We present results for different scenarios. First, when heterogeneity is ruled out, Harrodian instability is shown to emerge as for the aggregate model. Instead, when heterogeneity is accounted for, a stable dynamics with endogenous fluctuations arises. At the same time, in this second scenario, all the Keynesian implications are preserved, including the presence of macroeconomic paradoxes. Sensitivity analysis confirms the general robustness of our results and the logical consistency of the model. Keywords Harrodian instability · Agent-based models · Coordination failures · Heterogeneous expectations JEL Classification E03 · E12 · E27
* Emanuele Russo [email protected] 1
Sant’Anna School of Advanced Studies, EMbeDS and Institute of Economics, Piazza Martiri della Libertà 33, 56127 Pisa, Italy
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Vol.:(0123456789)
Economia Politica
1 Introduction In light of the Great Recession, post-Keynesian theory has gained renewed popularity given the importance ascribed to aggregate demand and income distribution. Nevertheless, macro models in this tradition still face some important theoretical puzzles. Among them, the emergence of Harrodian instability (H-I) is certainly one of the most relevant. H-I, as originally stated in Harrod (1939), arise when moving from a static Keynesian model with exogenous investment rates to a dynamic framework in which investments have a capacity-creating effect. The main intuition is that firms, in response to a demand shock, will increase (or decrease) their investment rates in order to adjust their capital stock to the new level of demand. However, as investments are a key component of aggregated demand, this will further amplify the initial shock, driving the economy away from the equilibrium. This paper studies the emergence of H-I in the so-called neo-Kaleckian (N-K) model (Rowthorn 1981; Dutt 1984) and presents a novel approach to deal with instability adopting an agent-based methodology. More specifically, we build a simple agent-based version of the N-K model with decentralized invest
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