Economic Policies with Endogenous Innovation and Keynesian Demand Management

We study an evolutionary, agent-based model, which is a bridge between Keynesian theories of business cycles and Schumpeterian theories of economic growth. We employ the model to analyze the properties of macroeconomic dynamics and the effects of supply and demand polices. The model describes an economy composed of capital- and consumption-good firms, workers, and a bank. Capital-good firms perform R&D and produce heterogeneous machine tools. Consumption-good firms invest in new machines and produce a homogeneous consumption good. The bank finances firm production and investment plans and collects firm savings. Before carrying out policy analysis exercises, we empirically validate the model showing that it is able to replicate a wide spectrum of macroeconomic and microeconomic stylized facts. Simulation exercises show a strong complementarity between factors influencing aggregate demand and drivers of technological change that affect both "short-run" fluctuations and long-term growth patterns. From a normative point of view, simulations show a corresponding complementarity between "Keynesian" and "Schumpeterian" policies in sustaining long-run steady growth paths characterized by milder fluctuations and relatively lower unemployment levels.