The financial transmission of shocks in a simple hybrid macroeconomic agent based model

Tracking the chain of events generated by an aggregate shock in an Agent Based Model (ABM) is apparently an impossible mission. Employing the methodology described in Assenza and Delli Gatti (J Econ Dyn Control 37(8):1659–1682 2013) (AD2013 hereafter), in the present paper we show that such a task can be carried out in a straightforward way by using a hybrid macro ABM consisting of a IS curve, an Aggregate Supply (AS) curve and a Taylor Rule (TR) in that aggregate investment is a function of the moments of the distribution of firms’ net worth. For each shock (fiscal expansion, monetary tightening, financial shock) we can decompose the change of the aggregate scale of activity (measured by the employment rate) in a first round effect – i.e., the change generated by the shock keeping the moments of the distribution of net worth at the pre-shock level – and a second round effect, i.e., the change brought about by the variation in the moments induced by the aggregate shock. In turn, the second round effect can be decomposed in a term that would show up also in a pure Representative Agent setting (RA component) and a term that is specific to the model with Heterogeneous Agents (HA component). In all the cases considered, the first round effect explains most of the actual change of the output gap. The second round effect is unambiguously negative. The HA component has the same sign of the RA component and explains a sizable fraction of the second round effect.