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Agent-based financial markets and New Keynesian macroeconomics: a synthesis

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  • Matthias Lengnick
  • Hans-Werner Wohltmann

Abstract

We combine a simple agent-based model of financial markets and a New Keynesian macroeconomic model with bounded rationality via two straightforward channels. The result is a macroeconomic model that allows for the endogenous development of business cycles and stock price bubbles. We show that market sentiments exert important influence on the macroeconomy: Impulse-response functions of macroeconomic variables become more volatile which makes the effect of a given shock hard to predict. We also analyze the impact of different types of financial transaction taxes that are currently debated among policy makers (FTT, FAT, progressive FAT) and find that such taxes are well suited to stabilize the economy and raise funds from the financial sector as a contribution to the enormous costs created during the recent crisis. Our simulations suggest that the FTT leads to higher tax revenues and better stabilization results then the FAT. However, the FTT might also create huge distortion if set too high, a threat which the FAT does not imply. Copyright Springer-Verlag 2013

Suggested Citation

  • Matthias Lengnick & Hans-Werner Wohltmann, 2013. "Agent-based financial markets and New Keynesian macroeconomics: a synthesis," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 8(1), pages 1-32, April.
  • Handle: RePEc:spr:jeicoo:v:8:y:2013:i:1:p:1-32
    DOI: 10.1007/s11403-012-0100-y
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    More about this item

    Keywords

    Agent-based modeling; Stock market; New Keynesian macroeconomics; Financial transaction tax; Financial activities tax; E0; E62; G01; G18;
    All these keywords.

    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • G01 - Financial Economics - - General - - - Financial Crises
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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