Monetary policy and large crises in a financial accelerator agent-based model

Authored by Alberto Russo, Federico Giri, Luca Riccetti, Mauro Gallegati

Date Published: 2019

DOI: 10.1016/j.jebo.2018.04.007

Sponsors: European Union

Platforms: No platforms listed

Model Documentation: Other Narrative Mathematical description

Model Code URLs: Model code not found

Abstract

An accommodating monetary policy followed by a sudden increase of the short term interest rate often leads to a bubble burst and to an economic slowdown. Through the implementation of an Agent Based Model with a financial accelerator mechanism we are able to study the relationship between monetary policy and large-scale crisis events. A two-step computational approach is proposed which performs (i) a pattern search of double dip episodes and (ii) counter-factual simulations implementing unconventional monetary policy. The main results can be summarized as follow: a) sudden and sharp increases of the policy rate can generate recessions; b) after a crisis, returning too soon and too quickly to a normal monetary policy regime can generate a double dip recession, while c) keeping the short term interest rate anchored to the zero lower bound in the short run can successfully avoid a further slowdown. (C) 2018 Elsevier B.V. All rights reserved.

Tags

Agent based model Financial accelerator monetary policy Credit Cycle Large crises Zero lower bound