Monetary policy and dark corners in a stylized agent-based model

Authored by Stanislao Gualdi, Jean-Philippe Bouchaud, Marco Tarzia, Francesco Zamponi

Date Published: 2017

DOI: 10.1007/s11403-016-0174-z

Sponsors: No sponsors listed

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Model Documentation: Other Narrative Pseudocode Mathematical description

Model Code URLs: Model code not found

Abstract

We extend in a minimal way the stylized macroeconomic Agent-Based model introduced in our previous paper (Gualdi et al. in J Econ Dyn Control 50:29-61, 2015a), with the aim of investigating the role and efficacy of monetary policy of a `Central Bank' that sets the interest rate such as to steer the economy towards a prescribed inflation and employment rate. Our major finding is that provided its policy is not too aggressive (in a sense detailed in the paper) the Central Bank is successful in achieving its goals. However, the existence of different equilibrium states of the economy, separated by phase boundaries (or ``dark corners{''}), can cause the monetary policy itself to trigger instabilities and be counter-productive. In other words, the Central Bank must navigate in a narrow window: too little is not enough, too much leads to instabilities and wildly oscillating economies. This conclusion strongly contrasts with the prediction of DSGE models.

Tags

Complexity Economy Crisis Keynesian model