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Banks, Market Organization, and Macroeconomic Performance: An Agent-Based Computational Analysis

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  • Quamrul Ashraf
  • Boris Gershman
  • Peter Howitt

Abstract

This paper is an exploratory analysis of the role that banks play in supporting the mechanism of exchange. It considers a model economy in which exchange activities are facilitated and coordinated by a self-organizing network of entrepreneurial trading firms. Collectively, these firms play the part of the Walrasian auctioneer, matching buyers with sellers and helping the economy to approximate equilibrium prices that no individual is able to calculate. Banks affect macroeconomic performance in this economy because their lending activities facilitate entry of trading firms and also influence their exit decisions. Both entry and exit have conflicting effects on performance, and we resort to computational analysis to understand how they are resolved. Our analysis sheds new light on the conflict between micro-prudential bank regulation and macroeconomic stability. Specifically, it draws an important distinction between "normal" performance of the economy and "worst-case" scenarios, and shows that micro prudence conflicts with macro stability only in bad times. The analysis also shows that banks provide a "financial stabilizer" that in some respects can more than counteract the more familiar financial accelerator.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17102.

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Date of creation: Jun 2011
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Handle: RePEc:nbr:nberwo:17102

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References

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  1. Luca Sala & Antonella Trigari & Mark Gertler, 2007. "An Estimated Monetary DSGE Model with Unemployment and Staggered Nominal Wage Bargaining," 2007 Meeting Papers 353, Society for Economic Dynamics.
  2. Giovanni Dosi & Giorgio Fagiolo & Andrea Roventini, 2006. "An Evolutionary Model of Endogenous Business Cycles," Computational Economics, Society for Computational Economics, vol. 27(1), pages 3-34, February.
  3. Quamrul Ashraf & Boris Gershman & Peter Howitt, 2011. "How Inflation Affects Macroeconomic Performance: An Agent-Based Computational Investigation," Department of Economics Working Papers 2013-12, Department of Economics, Williams College, revised Feb 2013.
  4. Matias Braun & Borja Larrain, 2004. "Finance and the Business Cycle: International, Inter-industry Evidence," Finance 0403001, EconWPA.
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  6. Amano, Robert & Moran, Kevin & Murchison, Stephen & Rennison, Andrew, 2009. "Trend inflation, wage and price rigidities, and productivity growth," Journal of Monetary Economics, Elsevier, vol. 56(3), pages 353-364, April.
  7. Ariel Burstein & Christian Hellwig, 2008. "Welfare Costs of Inflation in a Menu Cost Model," American Economic Review, American Economic Association, vol. 98(2), pages 438-43, May.
  8. Raddatz, Claudio, 2006. "Liquidity needs and vulnerability to financial underdevelopment," Journal of Financial Economics, Elsevier, vol. 80(3), pages 677-722, June.
  9. Durlauf, Steven N. & Maccini, Louis J., 1995. "Measuring noise in inventory models," Journal of Monetary Economics, Elsevier, vol. 36(1), pages 65-89, August.
  10. Mikhail Golosov & Robert E. Lucas Jr., 2007. "Menu Costs and Phillips Curves," Journal of Political Economy, University of Chicago Press, vol. 115, pages 171-199.
  11. Christophe Deissenberg & Sander Van Der Hoog & Herbert Dawid, 2008. "EURACE: A Massively Parallel Agent-Based Model of the European Economy," Working Papers halshs-00339756, HAL.
  12. Loayza, Norman V. & Raddatz, Claudio, 2006. "The structural determinants of external vulnerability," Policy Research Working Paper Series 4089, The World Bank.
  13. Howitt, Peter & Clower, Robert, 2000. "The emergence of economic organization," Journal of Economic Behavior & Organization, Elsevier, vol. 41(1), pages 55-84, January.
  14. Jon Steinsson & Emi Nakamura, 2007. "Monetary Non-Neutrality in a Multi-Sector Menu Cost Model," 2007 Meeting Papers 736, Society for Economic Dynamics.
  15. Gauti B. Eggertsson & Michael Woodford, 2003. "The Zero Bound on Interest Rates and Optimal Monetary Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(1), pages 139-235.
  16. Williamson, Stephen D, 1987. "Financial Intermediation, Business Failures, and Real Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 95(6), pages 1196-1216, December.
  17. Roberts, John M, 1995. "New Keynesian Economics and the Phillips Curve," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 975-84, November.
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Cited by:
  1. Quamrul Ashraf & Boris Gershman & Peter Howitt, 2012. "How Inflation Affects Macroeconomic Performance: An Agent-Based Computational Investigation," NBER Working Papers 18225, National Bureau of Economic Research, Inc.
  2. Giovani Dosi & Giorgio Fagiolo & Andrea Roventini & Mauro Napoletano, 2012. "Income Distribution, Credit and Fiscal Policies in an Agent-Based Keynesian Model," INET Research Notes 11, Institute for New Economic Thinking (INET).
  3. Giovanni Dosi, 2012. "Economic Coordination and Dynamics: Some Elements of an Alternative "Evolutionary" Paradigm," LEM Papers Series 2012/08, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
  4. LeBaron, Blake, 2012. "Heterogeneous gain learning and the dynamics of asset prices," Journal of Economic Behavior & Organization, Elsevier, vol. 83(3), pages 424-445.
  5. Howitt, Peter, 2012. "What have central bankers learned from modern macroeconomic theory?," Journal of Macroeconomics, Elsevier, vol. 34(1), pages 11-22.
  6. Giorgio Fagiolo & Andrea Roventini, 2012. "Macroeconomic Policy in DSGE and Agent-Based Models," EconomiX Working Papers 2012-17, University of Paris West - Nanterre la Défense, EconomiX.
  7. Giovanni Dosi & Giorgio Fagiolo & Mauro Napoletano & Andrea Roventini, 2012. "Income distribution, credit and fiscal policies in an agent-based keynesian model," Sciences Po publications 2012-06, Sciences Po.
  8. Yong Suk Lee, 2012. "Educational Tracking, Residential Sorting, and Intergenerational Mobility," Department of Economics Working Papers 2012-06, Department of Economics, Williams College.
  9. Mauro Napoletano & Jean-Luc Gaffard & Zakaria Babutsidze, 2012. "Agent Based Models A New Tool for Economic and Policy Analysis: A New Tool for Economic and Policy Analysis," Sciences Po publications 3, Sciences Po.

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