Stabilizing an unstable complex economy on the limitations of simple rules

Authored by Pascal Seppecher, Isabelle Salle

Date Published: 2018

DOI: 10.1016/j.jedc.2018.02.014

Sponsors: No sponsors listed

Platforms: Java

Model Documentation: Other Narrative Flow charts Pseudocode

Model Code URLs: https://github.com/pseppecher/jamel

Abstract

This paper offers a systematic comparison of a wide range of leaning-against-the-wind interest-rate policy rules within a macroeconomic, stock-flow consistent, agent-based model. The model generates endogenous booms and busts along credit cycles. As feed back loops on aggregate demand affect the goods and the labor markets, the real and the financial sides of the economy are closely interconnected. The baseline scenario is able to qualitatively reproduce a wide range of stylized facts. We show that a monetary policy rule that targets the movements in the net worth of firms significantly dampens the credit cycles and reduces the employment costs of financial crises, because this indicator incorporates early signals of financial imbalances. Performances of this three-mandate Taylor rule are also more robust to the specific parameter values and regulatory framework than the standard dual-mandate Taylor rules. Nonetheless, none of the policy rules under study completely eliminates the high employment costs of financial crises. (C) 2018 Elsevier B.V. All rights reserved.

Tags

Agent-based modeling Model Credit cycles Macroeconomics Credit Debt Monetary-policy Leaning-against-the-wind Monetary and macroprudential policies