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

Monetary policy and dark corners in a stylized agent-based model 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. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Economic Interaction and Coordination Springer Journals

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

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Publisher
Springer Berlin Heidelberg
Copyright
Copyright © 2016 by Springer-Verlag Berlin Heidelberg
Subject
Economics; Economic Theory/Quantitative Economics/Mathematical Methods; Computer Appl. in Social and Behavioral Sciences; Theoretical, Mathematical and Computational Physics; Finance, general
ISSN
1860-711X
eISSN
1860-7128
D.O.I.
10.1007/s11403-016-0174-z
Publisher site
See Article on Publisher Site

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.

Journal

Journal of Economic Interaction and CoordinationSpringer Journals

Published: May 25, 2016

References

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