IDEAS home Printed from https://ideas.repec.org/p/fce/doctra/1821.html
   My bibliography  Save this paper

Market disequilibrium, monetary policy, and financial markets : insights from new tools

Author

Listed:
  • Jean-Luc Gaffard

    (OFCE & Sciences Po Paris, Université Côte d'Azur)

  • Mauro Napoletano

    (OFCE & Sciences Po Paris, Scuola Superiore Sant'Anna)

Abstract

We revisit the main building blocks of the theoretical models underlying the monetary policy consensus before the Great Recession. We highlight how the failure of these models to prevent the crisis and to provide guidance during the recession were due to the excessive confidence in the ability of markets to coordinate demand and supply, and to the neglect of the role of finance. Furthermore, we outline the main elements of an alternative approach to monetary policy that put emphasis on the processes driving coordination in markets, and on the externalities transmitted by financial inter-linkages. Many elements of this new approach are captured by new classes of models, namely, agent-based and financial network models. We discuss some insights from these models for the conduct of monetary policy, and for its interactions with fiscal and macroprudential policies.

Suggested Citation

  • Jean-Luc Gaffard & Mauro Napoletano, 2018. "Market disequilibrium, monetary policy, and financial markets : insights from new tools," Documents de Travail de l'OFCE 2018-21, Observatoire Francais des Conjonctures Economiques (OFCE).
  • Handle: RePEc:fce:doctra:1821
    as

    Download full text from publisher

    File URL: http://www.ofce.sciences-po.fr/pdf/dtravail/OFCEWP2018-21.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Luu, Duc Thi & Napoletano, Mauro & Barucca, Paolo & Battiston, Stefano, 2021. "Collateral Unchained: Rehypothecation networks, concentration and systemic effects," Journal of Financial Stability, Elsevier, vol. 52(C).
    2. Olivier Blanchard, 2018. "Should We Reject the Natural Rate Hypothesis?," Journal of Economic Perspectives, American Economic Association, vol. 32(1), pages 97-120, Winter.
    3. Salle, Isabelle & Yıldızoğlu, Murat & Sénégas, Marc-Alexandre, 2013. "Inflation targeting in a learning economy: An ABM perspective," Economic Modelling, Elsevier, vol. 34(C), pages 114-128.
    4. Stefano Battiston & Mattia Guerini & Mauro Napoletano & Veronika Stolbova, 2018. "Financialization in the EU and its consequences," SciencePo Working papers Main hal-03606070, HAL.
    5. Mario Amendola & Jean-Luc Gaffard, 2010. "Unemployment as a Disequilibrium Phenomenon: the economics of Keynes and how to go ahead from Patinkin, Leijonhufvud and Hicks," Documents de Travail de l'OFCE 2010-24, Observatoire Francais des Conjonctures Economiques (OFCE).
    6. Giorgio Fagiolo & Andrea Roventini, 2017. "Macroeconomic Policy in DSGE and Agent-Based Models Redux: New Developments and Challenges Ahead," Journal of Artificial Societies and Social Simulation, Journal of Artificial Societies and Social Simulation, vol. 20(1), pages 1-1.
    7. Reenu, 2008. "Role of Economic Reform in the Growth of Indian Economy," Journal of Commerce and Trade, Society for Advanced Management Studies, vol. 3(1), pages 19-22, April.
    8. repec:hal:spmain:info:hdl:2441/eu4vqp9ompqllr09hc024acpp is not listed on IDEAS
    9. repec:hal:spmain:info:hdl:2441/3qv4spsglp8tmorvev1h0duo4p is not listed on IDEAS
    10. Daron Acemoglu & Asuman Ozdaglar & Alireza Tahbaz-Salehi, 2015. "Systemic Risk and Stability in Financial Networks," American Economic Review, American Economic Association, vol. 105(2), pages 564-608, February.
    11. Mauro Napoletano, 2017. "Les modèles multi-agents et leurs conséquences pour l’analyse macroéconomique," Revue de l'OFCE, Presses de Sciences-Po, vol. 0(4), pages 289-316.
    12. Borio, Claudio & Zhu, Haibin, 2012. "Capital regulation, risk-taking and monetary policy: A missing link in the transmission mechanism?," Journal of Financial Stability, Elsevier, vol. 8(4), pages 236-251.
    13. repec:hal:spmain:info:hdl:2441/7onmk2tvei9r885j9anjrbiah5 is not listed on IDEAS
    14. Jean-Luc Gaffard, 2017. "Vers une macroéconomie non-walrasienne," Revue de l'OFCE, Presses de Sciences-Po, vol. 0(4), pages 265-288.
    15. Tobias Adrian & Hyun Song Shin, 2014. "Procyclical Leverage and Value-at-Risk," Review of Financial Studies, Society for Financial Studies, vol. 27(2), pages 373-403.
    16. repec:hal:wpspec:info:hdl:2441/eu4vqp9ompqllr09hc024acpp is not listed on IDEAS
    17. repec:hal:spmain:info:hdl:2441/4q63gsp61h87h81knveut4qm7m is not listed on IDEAS
    18. Franklin Allen & Douglas Gale, 2000. "Financial Contagion," Journal of Political Economy, University of Chicago Press, vol. 108(1), pages 1-33, February.
    19. Dosi, Giovanni & Fagiolo, Giorgio & Napoletano, Mauro & Roventini, Andrea, 2013. "Income distribution, credit and fiscal policies in an agent-based Keynesian model," Journal of Economic Dynamics and Control, Elsevier, vol. 37(8), pages 1598-1625.
    20. Olivier Blanchard & Jordi Galí, 2007. "Real Wage Rigidities and the New Keynesian Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(s1), pages 35-65, February.
    21. Diamond, Peter A, 1982. "Aggregate Demand Management in Search Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 90(5), pages 881-894, October.
    22. Battiston, Stefano & Delli Gatti, Domenico & Gallegati, Mauro & Greenwald, Bruce & Stiglitz, Joseph E., 2012. "Liaisons dangereuses: Increasing connectivity, risk sharing, and systemic risk," Journal of Economic Dynamics and Control, Elsevier, vol. 36(8), pages 1121-1141.
    23. Gertler, Mark & Kiyotaki, Nobuhiro, 2010. "Financial Intermediation and Credit Policy in Business Cycle Analysis," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 11, pages 547-599, Elsevier.
    24. Mario Amendola & Jean-Luc Gaffard, 2006. "The market way to riches: behind the myth," Post-Print halshs-00420556, HAL.
    25. Arifovic, Jasmina & Dawid, Herbert & Deissenberg, Christophe & Kostyshyna, Olena, 2010. "Learning benevolent leadership in a heterogenous agents economy," Journal of Economic Dynamics and Control, Elsevier, vol. 34(9), pages 1768-1790, September.
    26. Dosi, Giovanni & Fagiolo, Giorgio & Napoletano, Mauro & Roventini, Andrea & Treibich, Tania, 2015. "Fiscal and monetary policies in complex evolving economies," Journal of Economic Dynamics and Control, Elsevier, vol. 52(C), pages 166-189.
    27. Hicks, John, 2017. "A Market Theory of Money," OUP Catalogue, Oxford University Press, number 9780198796237.
    28. Tesfatsion, Leigh & Judd, Kenneth L., 2006. "Handbook of Computational Economics, Vol. 2: Agent-Based Computational Economics," Staff General Research Papers Archive 10368, Iowa State University, Department of Economics.
    29. Michael Woodford, 2011. "Simple Analytics of the Government Expenditure Multiplier," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(1), pages 1-35, January.
    30. Tesfatsion, Leigh, 2006. "Agent-Based Computational Modeling and Macroeconomics," ISU General Staff Papers 200601010800001585, Iowa State University, Department of Economics.
    31. Howitt, Peter & Clower, Robert, 2000. "The emergence of economic organization," Journal of Economic Behavior & Organization, Elsevier, vol. 41(1), pages 55-84, January.
    32. Larry Eisenberg & Thomas H. Noe, 2001. "Systemic Risk in Financial Systems," Management Science, INFORMS, vol. 47(2), pages 236-249, February.
    33. Tobin, James, 1972. "Inflation and Unemployment," American Economic Review, American Economic Association, vol. 62(1), pages 1-18, March.
    34. Gai, Prasanna & Haldane, Andrew & Kapadia, Sujit, 2011. "Complexity, concentration and contagion," Journal of Monetary Economics, Elsevier, vol. 58(5), pages 453-470.
    35. Cross,Rod Preface by-Name:Blanchard,Olivier (ed.), 1995. "The Natural Rate of Unemployment," Cambridge Books, Cambridge University Press, number 9780521483308, October.
    36. Gorton, Gary & Metrick, Andrew, 2012. "Securitized banking and the run on repo," Journal of Financial Economics, Elsevier, vol. 104(3), pages 425-451.
    37. Adrian, Tobias & Shin, Hyun Song, 2010. "Liquidity and leverage," Journal of Financial Intermediation, Elsevier, vol. 19(3), pages 418-437, July.
    38. Salle, Isabelle L., 2015. "Modeling expectations in agent-based models — An application to central bank's communication and monetary policy," Economic Modelling, Elsevier, vol. 46(C), pages 130-141.
    39. Alan P. Kirman, 1992. "Whom or What Does the Representative Individual Represent?," Journal of Economic Perspectives, American Economic Association, vol. 6(2), pages 117-136, Spring.
    40. McLeay, Michael & Radia, Amar & Thomas, Ryland, 2014. "Money creation in the modern economy," Bank of England Quarterly Bulletin, Bank of England, vol. 54(1), pages 14-27.
    41. Amendola, Mario & Gaffard, Jean-Luc, 1998. "Out of Equilibrium," OUP Catalogue, Oxford University Press, number 9780198293804.
    42. Leigh Tesfatsion & Kenneth L. Judd (ed.), 2006. "Handbook of Computational Economics," Handbook of Computational Economics, Elsevier, edition 1, volume 2, number 2.
    43. Joseph E. Stiglitz, 2011. "Rethinking Macroeconomics: What Failed, And How To Repair It," Journal of the European Economic Association, European Economic Association, vol. 9(4), pages 591-645, August.
    44. Rama Cont & Amal Moussa & Edson B Santos, 2013. "Network structure and systemic risk in banking systems," Post-Print hal-00912018, HAL.
    45. Peter Howitt & Robert Clower, 1998. "Keynes and the Classics: An End of Century View," Working Papers 98-13, Ohio State University, Department of Economics.
    46. repec:hal:spmain:info:hdl:2441/2b7q60gmqo82aqr0p34bieidke is not listed on IDEAS
    47. Gabriele Visentin & Stefano Battiston & Marco D'Errico, 2016. "Rethinking Financial Contagion," Papers 1608.07831, arXiv.org.
    48. Gatti, Domenico Delli & Guilmi, Corrado Di & Gaffeo, Edoardo & Giulioni, Gianfranco & Gallegati, Mauro & Palestrini, Antonio, 2005. "A new approach to business fluctuations: heterogeneous interacting agents, scaling laws and financial fragility," Journal of Economic Behavior & Organization, Elsevier, vol. 56(4), pages 489-512, April.
    49. Paul J. J. Welfens, 2008. "ICT – productivity and economic growth in Europe," Springer Books, in: Paul J. J. Welfens & Ellen Walther-Klaus (ed.), Digital Excellence, pages 13-39, Springer.
    50. Gertler, Mark & Karadi, Peter, 2011. "A model of unconventional monetary policy," Journal of Monetary Economics, Elsevier, vol. 58(1), pages 17-34, January.
    51. repec:hal:spmain:info:hdl:2441/1vuuc40kfk882pj3nudst5fhct is not listed on IDEAS
    52. Howitt, Peter, 2012. "What have central bankers learned from modern macroeconomic theory?," Journal of Macroeconomics, Elsevier, vol. 34(1), pages 11-22.
    53. Mario Amendola & Jean-Luc Gaffard, 2006. "The Market Way to Riches," Books, Edward Elgar Publishing, number 4234.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. repec:hal:spmain:info:hdl:2441/3tl6t49e929fla0aa2ukppot8n is not listed on IDEAS
    2. Jean-Luc Gaffard & Mauro Napoletano, 2018. "Hétérogénéité des agents, interconnexions financières et politique monétaire : une approche non conventionnelle," Revue française d'économie, Presses de Sciences-Po, vol. 0(3), pages 201-231.
    3. repec:hal:spmain:info:hdl:2441/1gb0ntthu59j4pgf4ju708hsdv is not listed on IDEAS
    4. Mauro Napoletano, 2018. "A Short Walk on the Wild Side: Agent-Based Models and their Implications for Macroeconomic Analysis," Revue de l'OFCE, Presses de Sciences-Po, vol. 0(3), pages 257-281.
    5. repec:hal:spmain:info:hdl:2441/2qdhj5485p93jrnf08s1meeap9 is not listed on IDEAS
    6. Dosi, Giovanni & Fagiolo, Giorgio & Napoletano, Mauro & Roventini, Andrea & Treibich, Tania, 2015. "Fiscal and monetary policies in complex evolving economies," Journal of Economic Dynamics and Control, Elsevier, vol. 52(C), pages 166-189.
    7. repec:hal:spmain:info:hdl:2441/f6h8764enu2lskk9p6go0e900 is not listed on IDEAS
    8. repec:hal:spmain:info:hdl:2441/3qv4spsglp8tmorvev1h0duo4p is not listed on IDEAS
    9. Popoyan, Lilit & Napoletano, Mauro & Roventini, Andrea, 2017. "Taming macroeconomic instability: Monetary and macro-prudential policy interactions in an agent-based model," Journal of Economic Behavior & Organization, Elsevier, vol. 134(C), pages 117-140.
    10. repec:hal:spmain:info:hdl:2441/5bnglqth5987gaq6dhju3psjn3 is not listed on IDEAS
    11. Giorgio Fagiolo & Andrea Roventini, 2017. "Macroeconomic Policy in DSGE and Agent-Based Models Redux: New Developments and Challenges Ahead," Journal of Artificial Societies and Social Simulation, Journal of Artificial Societies and Social Simulation, vol. 20(1), pages 1-1.
    12. Popoyan, Lilit & Napoletano, Mauro & Roventini, Andrea, 2020. "Winter is possibly not coming: Mitigating financial instability in an agent-based model with interbank market," Journal of Economic Dynamics and Control, Elsevier, vol. 117(C).
    13. repec:hal:spmain:info:hdl:2441/dcditnq6282sbu1u151qe5p7f is not listed on IDEAS
    14. repec:hal:spmain:info:hdl:2441/1j4v8sl4fc9a49ankmnhv6bb6a is not listed on IDEAS
    15. repec:hal:spmain:info:hdl:2441/5hussro0tc951q0jqpu8quliqu is not listed on IDEAS
    16. Lilit Popoyan, 2020. "Macroprudential Policy: a Blessing or a Curse?," Review of Economics and Institutions, Università di Perugia, vol. 11(1-2).
    17. Eugenio Caverzasi & Alberto Russo, 2018. "Toward a new microfounded macroeconomics in the wake of the crisis," Industrial and Corporate Change, Oxford University Press, vol. 27(6), pages 999-1014.
    18. Giovanni Dosi & Mauro Napoletano & Andrea Roventini & Joseph E. Stiglitz & Tania Treibich, 2020. "Rational Heuristics? Expectations And Behaviors In Evolving Economies With Heterogeneous Interacting Agents," Economic Inquiry, Western Economic Association International, vol. 58(3), pages 1487-1516, July.
    19. repec:spo:wpecon:info:hdl:2441/f6h8764enu2lskk9p6go0e900 is not listed on IDEAS
    20. repec:hal:wpspec:info:hdl:2441/f6h8764enu2lskk9p6go0e900 is not listed on IDEAS
    21. Giorgio Fagiolo & Andrea Roventini, 2016. "Macroeconomic Policy in DGSE and Agent-Based Models Redux," Working Papers hal-03459348, HAL.
    22. repec:hal:spmain:info:hdl:2441/31dhti786q9k0q2i04klh6no54 is not listed on IDEAS
    23. Fischer, Thomas & Riedler, Jesper, 2014. "Prices, debt and market structure in an agent-based model of the financial market," Journal of Economic Dynamics and Control, Elsevier, vol. 48(C), pages 95-120.
    24. Li, Boyao, 2017. "The impact of the Basel III liquidity coverage ratio on macroeconomic stability: An agent-based approach," Economics Discussion Papers 2017-2, Kiel Institute for the World Economy (IfW Kiel).
    25. Giovanni Dosi & Andrea Roventini, 2019. "More is different ... and complex! the case for agent-based macroeconomics," Journal of Evolutionary Economics, Springer, vol. 29(1), pages 1-37, March.
    26. Wiersema, Garbrand & Kleinnijenhuis, Alissa M. & Wetzer, Thom & Farmer, J. Doyne, 2023. "Scenario-free analysis of financial stability with interacting contagion channels," Journal of Banking & Finance, Elsevier, vol. 146(C).
    27. Luca Riccetti & Alberto Russo & Mauro Gallegati, 2015. "An agent based decentralized matching macroeconomic model," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 10(2), pages 305-332, October.
    28. Francesco Lamperti & Antoine Mandel & Mauro Napoletano & Alessandro Sapio & Andrea Roventini & Tomas Balint & Igor Khorenzhenko, 2017. "Taming macroeconomic instability," SciencePo Working papers Main hal-03399574, HAL.
    29. Ashraf, Quamrul & Gershman, Boris & Howitt, Peter, 2017. "Banks, market organization, and macroeconomic performance: An agent-based computational analysis," Journal of Economic Behavior & Organization, Elsevier, vol. 135(C), pages 143-180.
    30. Luu, Duc Thi & Napoletano, Mauro & Barucca, Paolo & Battiston, Stefano, 2021. "Collateral Unchained: Rehypothecation networks, concentration and systemic effects," Journal of Financial Stability, Elsevier, vol. 52(C).
    31. Giovanni Dosi & Andrea Roventini, 2017. "Agent-Based Macroeconomics and Classical Political Economy: Some Italian Roots," Italian Economic Journal: A Continuation of Rivista Italiana degli Economisti and Giornale degli Economisti, Springer;Società Italiana degli Economisti (Italian Economic Association), vol. 3(3), pages 261-283, November.
    32. Giovanni Dosi & Mauro Napoletano & Andrea Roventini & Tania Treibich, 2016. "The Short- and Long-Run Damages of Fiscal Austerity: Keynes beyond Schumpeter," International Economic Association Series, in: Joseph E. Stiglitz & Martin Guzman (ed.), Contemporary Issues in Macroeconomics, chapter 8, pages 79-100, Palgrave Macmillan.

    More about this item

    Keywords

    Output-inflation dynamics; new-keynesian models; disequilibrium analysis; agent-based models; fiscal monetary policy interactions; quantitative easing policies;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fce:doctra:1821. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Francesco Saraceno (email available below). General contact details of provider: https://edirc.repec.org/data/ofcspfr.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.