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

The interaction of debt and economic performance has been getting more at-tention over the last few years. However, models making provision for debt are still out-numbered by models completely ignoring it. This paper is the first one to analyze therelationship between household debt (in the form of bank loans) and economic perfor-mance (in terms of aggregate income) considering both the impact of wealth and incomedistribution, and the impact of the MPC distribution under various financial shocks. Theoutcomes of the model are velocities calculated as ratios of aggregate income to aggregatedebt. The paper demonstrates how financial shocks affect the income velocity of moneyunder different distributions of wealth/income and marginal propensity to consume acrossthe population. For this purpose, an original agent-based simulation model with a limitedloan supply was designed. Proposed model shocks are shocks to loan demand, loan sup-ply, marginal propensity to consume, macro-prudential regulatory ratios, real estate cap-ital gains, repayment ratios, shocks to the structure of loans provided and to the structureof real estate property transactions. It is shown that the more equal the distributions ofwealth/income and of the marginal propensity to consume, the higher is the income ve-locity of money. From financial shocks, the marginal propensity to consume shock andthe shock to the structure of new real estate property purchases have the largest impacton velocity. The shock to regulatory ratios has generally the lowest magnitude