Discussion Paper

No. 2010-4 | January 12, 2010
Credit Money and Macroeconomic Instability in the Agent-based Model and Simulator Eurace


The paper presented a study on the relationship between credit money and economic instability. The issue is of primary importance because, as it is generally stated, lower variability of output and inflation has numerous economic benefits. We address this problem by means of an agent-based model and simulator, called Eurace, which is characterized by a complete set of interrelated markets and different types of interacting agents, modelled according to a rigorous balance-sheet approach. The dynamics of credit money is endogenous and depends on the supply of credit from the banking system, which is constrained by its equity base, and the demand of credit from firms in order to finance their production activity. Alternative dynamic paths for credit money have been produced by setting different firms' dividend policies. Results show the emergence of endogenous business cycles which are mainly due to the interplay between the real economic activity and its financing through the credit market. In particular, the amplitude of the business cycles strongly raises when the fraction of earnings paid out by firms as dividends is higher, that is when firms are more constrained to borrow credit money to fund their activity. This interesting evidence can be explained by the fact that the level of firms leverage, defined as the debt-equity ratio, can be considered ad a proxy of the likelihood of bankruptcy, an event which causes mass layoffs and supply decrease.

Paper submitted to the special issue
Managing Financial Instability in Capitalist Economies

JEL Classification:

E2, E32, E42



Cite As

Silvano Cincotti, Marco Raberto, and Andrea Teglio (2010). Credit Money and Macroeconomic Instability in the Agent-based Model and Simulator Eurace. Economics Discussion Papers, No 2010-4, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2010-4

Comments and Questions

Anonymous - Referee Report 1
February 18, 2010 - 09:35

See attached file

Silvano Cincotti - Reply to Referee Report 1
September 06, 2010 - 09:13

see attached file

Enrico Scalas - Some comments
February 18, 2010 - 20:40

1. General considerations

This paper is a report on how to use the agent-based simulator EURACE for policy analyses on macro instabilities. In my opinion, the study is in line with recent advances on balace sheet interlinkages [1].
Perhaps the presentation is too essential and the style may need ...[more]

... some improvement. However, these are minor problems and the authors can easily address them.

This paper can also be considered as a useful pointer and short guide to the relevant reports and documents on the EURACE simulator.

All in all, I believe it can be published after minor revisions.

2. Specific points

2.1 Cobb-Douglas production function

I was a bit surprised to see the use of the Cobb-Douglas production function in an otherwise quite realistic simulation. This function is perhaps useful for teaching and historical purposes, but P. Sylos Labini convincingly criticized its use in macroeconomics [2]. Such criticisms could perhaps be incorporated in a future version of the simulator.

2.2 Averages vs. distributions

In principle, the simulator is able to give full distributional information and it is a pity that the authors only present the average results over three simulations. Without extensive simulations, the statistical robustness of the results can be challenged. However, if the purpose of the paper is to show the feasibility of stability analyses within the simulator settings, these results may be enough, and current conclusions in section 3 are consistent with this weakness of the paper.

2.3 English style

Apart from these two points, I believe that a revision of the English style would be beneficial to the clarity of this study. Already in the first line of the abstract why use "presented" instead of "presents"?


[1] O. Castren and I.K. Kavonius, Balance sheet interlinkages and macro-financial risk analysis in the euro area. European Central Bank, Working Paper Series n. 1124, December 2009.

[2] M. Corsi and G. Guarini, La fonction de productivité de Sylos Labini: aspects théoriques et empiriques, Revue d'economie industrielle, 118 (2), 2007.

Silvano Cincotti - Reply to Enrico Scalas
September 06, 2010 - 09:14

see attached file

Philip George - Bank Credit
March 20, 2010 - 01:56

Credit from banks account for only a small part of total credit. The Economist of May 16th, 2009 said that in the US bank credit was only 20% of total credit. In Europe the figure would be higher, but still only a small part of total credit. How would you ...[more]

... account for that?

Anonymous - Referee Report 2
May 04, 2010 - 09:48

See attached file

Silvano Cincotti - Reply to Referee Report 2
September 06, 2010 - 09:20

see attached file