Macro- And Microprudential Policies: Sweet and Lowdown in a Credit Network Agent-Based Model

Abstract

The paper presents an agent-based model reproducing a stylized credit network that evolves endogenously through the individual choices of firms and banks. We introduce in this framework a financial stability authority in order to test the effects of different prudential policy measures designed to improve the resilience of the economic system. Simulations show that a combination of micro- and macroprudential policies reduces systemic risk but at the cost of increasing banks’ capital volatility. Moreover, the agent-based methodology allows us to implement an alternative meso regulatory framework that takes into consideration the connections between firms and banks. This policy targets only the more connected banks, increasing their capital requirement in order to reduce the diffusion of local shocks. Our results support the idea that the mesoprudential policy is able to reduce systemic risk without affecting the stability of banks’ capital structure.

Cascading bankruptcies under simultaneous sectorial shocks: Theory and application to the Tunisian banking sector

“…Riccetti et al (2022) develops an agent‐based model to analyse the firm–bank credit market interactions and shows that the effectiveness of macroprudential regulation (mainly through the countercyclical capital buffer) depends on the business cycle phase. Catullo et al (2021) develops an agent‐based model of firms‐banks interactions with a financial stability authority. The results show that mesoregulation rules taking into consideration the connections between firms and banks policy could reduce the systemic risk.…”

Monetary Policy and Reserve Requirements in a Small Open Economy

“…Recent studies emphasize that financial stability should be the primary objective of the macroprudential policy, instead of price and output gap stabilization, which are conventional objectives of the monetary policy (Glocker and Towbin (2012), Agénor et al (2013), Divino and Kornelius (2015), Rubio (2019)). However, macroprudential measures might improve the performance of the monetary policy in the presence of financial frictions and with the goal of financial stability by the central bank, when this objective is explicitly accounted for in the interest rate rule (Glocker and Towbin (2012)), in the reserve requirements rule (Divino and Kornelius (2015)), or in the capital requirements rule (Agénor et al (2013), Catullo et al (2019)). Reserve requirements are very effective and easily implemented in practice (Carvalho and Castro (2015b), Agénor et al (2018)) and should respond to credit growth to some extent (Ferreira and Nakane (2015), Gross and Semmler (2019)).…”