Causal analysis of demand-side economic growth sources using agent-based modelling

Abstract

Research on economic growth has been focused predominantly on production and innovation. The issue of how the funds of consumers and firms grow enough to enable the growth of nominal and real sales has been clouded either by the general equilibrium assumption or end-of-period measure of stock-flow consistency. Both imply that households and firms purchase the increased production using revenues from the very sales that generated them. In this paper, a financially and timing robust mechanism of growth of demand and funds available for spending is proposed. The fundamental mechanism is the sustainable, non-Ponzi, growth of value of new consumer and investment loans. It is proven why that is the case, and demonstrated that growth can occur only under stringent conditions concerning solvency and initial growth rates’ values. The proposed initialisation consistency procedure, among else, eliminates the burn-in periods problem. Results show nonlinear dependence of growth rates on the sizes of new debts and debt durations. Economic growth is the fastest when either the firms' or the consumers' sector takes out relatively large loans, but not both. While multiperiod debts are necessary for the growth process and long debt durations make more scenarios from the grid of parameters possible, they do not guarantee the fastest growth; the relation between debt duration, sizes of debts relative to incomes, and output/sales growth rates is nonlinear. The multiplier relation between growing income and spending, as well as endogenous behavioural spending are identified as second-order determinants of growth.