Taming macroeconomic instability: Monetary and macro-prudential policy interactions in an agent-based model

Authored by Andrea Roventini, Mauro Napoletano, Lilit Popoyan

Date Published: 2017

DOI: 10.1016/j.jebo.2016.12.017

Sponsors: European Union

Platforms: No platforms listed

Model Documentation: Other Narrative Mathematical description

Model Code URLs: Model code not found

Abstract

We develop an agent-based model to study the macroeconomic impact of alternative macro-prudential regulations and their possible interactions with different monetary policy rules. The aim is to shed light on the most appropriate policy mix to achieve the resilience of the banking sector and foster macroeconomic stability. Simulation results show that a triple-mandate Taylor rule, focused on output gap, inflation and credit growth, and a Basel III prudential regulation is the best policy mix to improve the stability of the banking sector and smooth output fluctuations. Moreover, we consider the different levers of Basel III and their combinations. We find that minimum capital requirements and counter-cyclical capital buffers allow to achieve results close to the Basel III first-best with a much more simplified regulatory framework. Finally, the components of Basel III are non-additive: the inclusion of an additional lever does not always improve the performance of the macro-prudential regulation. (C) 2016 Elsevier B.V. All rights reserved.

Tags

Agent-Based Computational Economics Financial accelerator Financial Stability Systemic risk monetary policy Credit Inflation Macro-prudential policy Basel iii regulation Macroprudential policy Capital regulation Keynesian model Adequacy