MONETARY POLICY AND DEBT DEFLATION: SOME COMPUTATIONAL EXPERIMENTS

The paper presents an agent-based model to study the possible effects of different fiscal and monetary policies in the context of debt deflation. We introduce a modified Taylor rule that includes the financial position of firms as a target. Monte Carlo simulations provide a representation of the com...

Full description

Saved in:
Bibliographic Details
Published in:Macroeconomic dynamics 2017-01, Vol.21 (1), p.214-242
Main Authors: Chiarella, C., Di Guilmi, C.
Format: Article
Language:English
Subjects:
Bankruptcy
Behavior
Business cycles
Central banks
Collateral
Deflation
Economic models
Economic theory
Fiscal policy
Inflation
Interest rates
Investments
Liquidity
Macroeconomics
Monetary policy
Monte Carlo simulation
Prices
Securities markets
Stock prices
Studies
Citations: Items that this one cites
Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:The paper presents an agent-based model to study the possible effects of different fiscal and monetary policies in the context of debt deflation. We introduce a modified Taylor rule that includes the financial position of firms as a target. Monte Carlo simulations provide a representation of the complex feedback effects generated by the interaction among the different transmission channels of monetary policy. The model also reproduces the evidence of low inflation during stock market booms and shows how it can lead to overinvestment and destabilize the system. The paper also investigates the possible reasons behind this stylized fact by testing different behavioral rules for the central bank. We find that, in a context of sticky prices and volatile expectations, endogenous credit creation can be identified as the main source of the divergent dynamics of prices in the real and financial sectors.
ISSN:1365-1005
1469-8056
DOI:10.1017/S1365100515000450