MONETARY POLICY AND DEBT DEFLATION: SOME COMPUTATIONAL EXPERIMENTS
Authored by C Chiarella, Guilmi C Di
Date Published: 2017
DOI: 10.1017/s1365100515000450
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Mathematical description
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Abstract
The paper presents an agent-based model to study the possible effects of
different fiscal and monetary policies in the context of debt deflation.
We introduce a modified Taylor rule that includes the financial position
of firms as a target. Monte Carlo simulations provide a representation
of the complex feedback effects generated by the interaction among the
different transmission channels of monetary policy. The model also
reproduces the evidence of low inflation during stock market booms and
shows how it can lead to overinvestment and destabilize the system. The
paper also investigates the possible reasons behind this stylized fact
by testing different behavioral rules for the central bank. We find
that, in a context of sticky prices and volatile expectations,
endogenous credit creation can be identified as the main source of the
divergent dynamics of prices in the real and financial sectors.
Tags
Market
Financial fragility
Model
complex dynamics
monetary policy
Business cycles
transmission
Macroeconomics
Credit
Agent-based
modeling
Debt deflation
Frictions