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Journal of Economic Interaction and Coordination
Erschienen in: Journal of Economic Interaction and Coordination 2/2020

11.12.2017 | Regular Article

Combining monetary policy and prudential regulation: an agent-based modeling approach

verfasst von: Michel Alexandre, Gilberto Tadeu Lima

Erschienen in: Journal of Economic Interaction and Coordination | Ausgabe 2/2020

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Abstract

This paper explores the interaction between monetary policy and prudential regulation in an agent-based modeling framework. Firms borrow funds from the banking system in an economy regulated by a central bank. The central bank carries out monetary policy, by setting the interest rate, and prudential regulation, by establishing the banking capital requirement. Different combinations of interest rate rule and capital requirement rule are evaluated with respect to both macroeconomic and financial stability. Several relevant policy implications were drawn. First, the efficacy of a given capital requirement rule or interest rate rule depends on the specification of the rule of the other type it is combined with. More precisely, less aggressive interest rate rules perform better when the range of variation of the capital requirement is narrower. Second, interest rate smoothing is more effective than the other interest rate rules assessed, as it outperforms those other rules with respect to financial stability and macroeconomic stability. Third, there is no tradeoff between financial and macroeconomic stability associated with a variation of either the capital requirement or the smoothing interest rate parameter. Finally, our results reinforce the cautionary finding of other studies regarding how output can be ravaged by a low inflation targeting.
Vorheriger Artikel Racial residential segregation in multiple neighborhood markets: a dynamic sorting study
Nächster Artikel Network calibration and metamodeling of a financial accelerator agent based model

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Fußnoten
1
While the role of financial disturbances in generating the 2008 financial crisis has been emphasized in most of the related studies, many authors highlight the importance of previous real sector imbalances in this process. For instance, the mismatch between real wages and productivity growth generated a structural flaw in aggregate demand in the U.S. economy prior to 2007 (Setterfield 2012). The relationship between income inequality and the recent financial crisis (e.g., through the fueling of financial bubbles) has also been extensively discussed (see, e.g., Palley 2016; Skott 2013).
 
2
By AB models we are referring to computational agent-based models. There are also models of heterogeneous interacting agents, solvable analytically through technics coming from statistical physics or Markov chains (Gallegati and Kirman 2012).
 
3
See the excellent review in Fagiolo and Roventini (2012).
 
4
EURACE is a large-scale, multi-sector agent-based model and simulator, which is under development since 2006 within an EU-funded research grant (Cincotti et al. 2011).
 
5
Tables 1 and 2, in which the representation of a stock–flow consistent (SFC) model is displayed, are simplified versions of, respectively, Tables 1.3 and 1.2 in Godley and Lavoie (2007). The government net worth with a plus sign (i.e., a negative government net worth) can be interpreted as “net government advances” to the other agents (dos Santos and Zezza 2008).
 
6
On consumers’ imperfect price knowledge, see, for instance, Rotemberg (2008).
 
7
Equation (1) can be interpreted as (i) a simple rule of thumb to deal with bounded rationality and asymmetric information or (ii) the solution of an optimization problem of the firm, consisting in maximizing profits net of bankruptcy costs. More details can be found in Delli Gatti et al. (2009).
 
8
The assumption of markup pricing behavior goes in hand with robust survey data evidence (e. g., Fabiani et al. 2006).
 
9
In fact, DTOT is also present in non-AB models, such as Flannery and Rangan (2006) and Frank and Goyal (2008, 2015).
 
10
No calibration exercise on empirical data was performed, but using reasonable parameter values was always a major concern. In fact, most of the parameter values were drawn from existing studies (e.g., Riccetti et al. 2013b). We run simulations on a range of reasonable values and chose a set of parameters whose results were not counterintuitive on empirical grounds.
 
11
We also tested both different values of \(\psi \) and rules in which wages are adjusted previously or concomitantly with the price level \(({w_t =f({p_t } )})\). Although in some cases the nominal wages lost their constancy, real wages did not display a remarkable different dynamics.
 
12
In our simulations, the average correlation varies between 0.42 and 0.60, depending on the combination between the interest rate rule and the capital requirement rule.
 
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Metadaten
Titel
Combining monetary policy and prudential regulation: an agent-based modeling approach
verfasst von
Michel Alexandre
Gilberto Tadeu Lima
Publikationsdatum
11.12.2017
Verlag
Springer Berlin Heidelberg
Erschienen in
Journal of Economic Interaction and Coordination / Ausgabe 2/2020
Print ISSN: 1860-711X
Elektronische ISSN: 1860-7128
DOI
https://doi.org/10.1007/s11403-017-0209-0

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