Dynamics of a Service Economy Driven by Random Transactions

TL;DR

This paper models a dynamic service economy using computer simulations to analyze how random transactions, monetary, and fiscal policies influence economic variables like sales, loans, and government debt.

Contribution

It introduces a fully specified computational model of a service economy that explores the effects of policy parameters on economic dynamics.

Findings

Credit supply and loan default rates significantly impact sales and economic stability.

Monetary and fiscal policy parameters influence account balances and government debt levels.

Simulation results demonstrate the importance of credit and confidence in economic fluctuations.

Abstract

Agents buy and sell services. All services are of equal quality. Buyers choose sellers at random. Monetary and fiscal policies are imposed by a central bank and a central government. Credit is supplied by a commercial banking system. Propensities to buy, sell, and lend depend on account balances, interest rates, tax rates and loan default rates. Computer simulations track weekly sales, loans, account balances, commercial bank profits, solvency and compliance with reserve requirements, and government debt. The model of this economy is fully specified by a computer program. The program allows the user to explore the effects of parameter changes. Monetary and fiscal policies are implemented by choices of parameters such as interest rates and reserve requirements, and government tax and spending rates. Credit supply, consumer confidence, and loan default rates strongly affect the behavior of the economy in terms of sales.