The Labour-Augmented K S Model: A Laboratory for the Analysis of Institutional and Policy Regimes

Abstract

In this work we discuss the research findings from the labour-augmented Schumpeter meeting Keynes (K S) agent-based model. It comprises comparative dynamics experiments on an artificial economy populated by heterogeneous, interacting agents, as workers, firms, banks and the government. The exercises are characterized by different degrees of labour flexibility, or by institutional shocks entailing labour market structural reforms, wherein the phenomenon of hysteresis is endogenous and pervasive. The K S model constitutes a laboratory to evaluate the effects of new institutional arrangements as active/passive labour market policies, and fiscal austerity. In this perspective, the model allows mimicking many of the customary policy responses which the European Union and many Latin American countries have embraced in reaction to the recent economic crises. The obtained results seem to indicate, however, that most of the proposed policies are likely inadequate to tackle the short-term crises consequences, and even risk demoting the long-run economic prospects. More objectively, the conclusions offer a possible explanation to the negative path traversed by economies like Brazil, where many of the mentioned policies were applied in a short period, and hint about some risks ahead.