Stabilizing an unstable complex economy on the limitations of simple rules

Abstract

This paper analyzes a range of alternative specifications of the interest rate policy rule within a macroeconomic, stock-flow consistent, agent-based model. In this model, firms' leverage strategies evolve under the selection pressure of market competition. The resulting process of collective adaptation generates endogenous booms and busts along credit cycles. As feedback 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, and to match quantitative orders of magnitude of the main economic indicators. We find that, despite the implementation of credit and balance sheet related prudential policies, the emerging dynamics feature strong instability. Targeting movements in the net worth of firms help dampen the credit cycles, and simultaneously reduce financial and macroeconomic volatility, but does not eliminate the occurrence of financial crises along with high costs in terms of unemployment.

Monetary policy and bank risk-taking in sub-Sahara Africa

“…Moreover, the rapid innovation in the financial sector has been regarded as a tool for achieving stability in the financial system. That notwithstanding, the crisis has given strong basis to argue that policy decisions aimed at financial stability can no longer be taken without recourse to the effect of monetary policy (Bruno et al, 2017;Salle & Seppecher, 2018). As well, monetary policy decisions must consider implications for financial stability.…”