Monetary Policy and Debt Deflation: Some Computational Experiments
AbstractThe 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 which includes the financial position of firms as a target. Monte Carlo simulations show that an excessive sensitivity of the central bank to inflation, the output gap and firms' debt can have undesired and destabilising effects on the system, while an active fiscal policy appears to be able to effectively stabilise the economy. The paper also addresses the puzzle of low inflation during stock market booms by testing different behavioural rules for the central bank. We find that, in a context of sticky prices and volatile expectations, endogenous credit can be identified as the main source of the divergent dynamics of prices in the real and financial sector.
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Bibliographic InfoPaper provided by Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University in its series CAMA Working Papers with number 2013-42.
Length: 28 pages
Date of creation: Jul 2013
Date of revision:
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Financial fragility; monetary policy; debt deflation; agent based modelling; complex dynamics.;
Other versions of this item:
- Carl Chiarella & Corrado Di Guilmi, 2013. "Monetary Policy and Debt Deflation: Some Computational Experiments," Working Paper Series 10, Economics Discipline Group, UTS Business School, University of Technology, Sydney.
- E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-07-15 (All new papers)
- NEP-CBA-2013-07-15 (Central Banking)
- NEP-CMP-2013-07-15 (Computational Economics)
- NEP-MAC-2013-07-15 (Macroeconomics)
- NEP-MON-2013-07-15 (Monetary Economics)
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