<abstract xmlns="http://www.w3.org/1999/xhtml">

<p>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.</p>
</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.

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

Prague University of Economics and Business

Review of Economic Perspectives

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 3.0 License.

{"article-title":"Financial shocks and their effects on velocity of money in agent-based model"}

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...

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

Published Online: Dec 24, 2022

Page range: 241 - 266

Received: May 02, 2022

Accepted: Oct 21, 2022

DOI: https://doi.org/10.2478/revecp-2022-0011

Keywords
velocity of money, wealth distribution, marginal propensity to consume, financial shocks

© 2022 Ján Boháčik, published by Sciendo

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 3.0 License.

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

Published Online: Dec 24, 2022

Page range: 241 - 266

Received: May 02, 2022

Accepted: Oct 21, 2022

DOI: https://doi.org/10.2478/revecp-2022-0011

Keywordsvelocity of money, wealth distribution, marginal propensity to consume, financial shocks

© 2022 Ján Boháčik, published by Sciendo

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 3.0 License.

Keywords
velocity of money, wealth distribution, marginal propensity to consume, financial shocks