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Sovereign Default Contagion And Monetary Policy In An Agent-Based Model

Author

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  • JOÃO SILVESTRE

    (Research Unit on Complexity and Economics (UECE), Instituto Superior de Economia e Gestão, University of Lisbon, Lisbon, Portugal)

Abstract

Sovereign default contagion was one of the most debated topics during the Eurozone sovereign debt crisis. Despite all the improvements in the financial situation since 2010, namely after European Central Bank quantitative easing policies, the nature of the problem and the policy prescriptions are still under dispute today. Using an agent-based model, we simulate sovereign default contagion for different monetary policy options in a world where governments have random incomes, different heterogeneous borrowing behaviors and risk aversion levels and where countries can enter into ex-ante agreements to protect themselves against default. Our simulations showed that default contagion can be a very fast and “destructive” process, and that monetary policy can have a very important role in preventing sovereign defaults through zero interest rate and quantitative easing policies.

Suggested Citation

  • João Silvestre, 2020. "Sovereign Default Contagion And Monetary Policy In An Agent-Based Model," Advances in Complex Systems (ACS), World Scientific Publishing Co. Pte. Ltd., vol. 23(04), pages 1-21, June.
    • Handle: RePEc:wsi:acsxxx:v:23:y:2020:i:04:n:s0219525920500101
    DOI: 10.1142/S0219525920500101
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