Banks, Market Organization, and Macroeconomic Performance: An Agent-Based Computational Analysis

Abstract

This paper is an exploratory analysis of the role that banks play in supporting the mechanism of exchange. It considers a model economy in which exchange activities are facilitated and coordinated by a self-organizing network of entrepreneurial trading firms. Collectively, these firms play the part of the Walrasian auctioneer, matching buyers with sellers and helping the economy to approximate equilibrium prices that no individual is able to calculate. Banks affect macroeconomic performance in this economy because their lending activities facilitate entry of trading firms and also influence their exit decisions. Both entry and exit have conflicting effects on performance, and we resort to computational analysis to understand how they are resolved. Our analysis sheds new light on the conflict between micro-prudential bank regulation and macroeconomic stability. Specifically, it draws an important distinction between "normal" performance of the economy and "worst-case" scenarios, and shows that micro prudence conflicts with macro stability only in bad times. The analysis also shows that banks provide a "financial stabilizer" that in some respects can more than counteract the more familiar financial accelerator.

Taming Macroeconomic Instability: Monetary and Macro Prudential Policy Interactions in an Agent-Based Model

“…These are the questions we are going to address extending the agent-based model (Tesfatsion & Judd 2006, LeBaron & Tesfatsion 2008) developed in Ashraf et al (2011). The model is populated by heterogenous, interacting firms, workers and banks, a Government and a Central Bank.…”

Macroeconomic Policy in DSGE and Agent-Based Models Redux: New Developments and Challenges Ahead

“…As a consequence, Basel II reduces default risk when leverage is low, but it magnifies it when leverage is high A new generation of agent-based models has been recently employed to study the effects of the introduction of Basel III macroprudential regulation and its possible interactions with monetary policy to achieve both price and financial stability. 26 Popoyan et al (2015) extend the ABM developed in Ashraf et al (2011) to address such issues exploring the joint and stand-alone impact of the different levers of Basel III for alternative monetary policies e.g. conservative, dualmandate Taylor rule, or "leaning against the wind" monetary rule focused on inflation, output gap and credit growth.…”

“…The role of loan-to-value ratios and static capital-adequacy regulation akin to the Basel II framework are studied in Ashraf et al (2011), with an ABM where heterogenous firms interact with banks providing them credit. Simulations of the model, calibrated to U.S data, show that during deep downturns bank credit can stabilize the economy, easing the entry of new firms and avoiding the bankruptcy of the incumbents.…”

Bubbles, Crashes, and the Financial Cycle: The Impact of Banking Regulation on Deep Recessions

“…These properties allow to gain important insights into the relevant mechanisms responsible for financial contagion effects and to explore the implications of different types of banking-and credit market regulations. Ashraf et al (2011) also explore the effects of different banking regulations, in a model of shop owners where market interactions are governed by search and matching processes. They study the role of banks both in normal times and in times of crises.…”