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

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  • Lengnick, Matthias
  • Wohltmann, Hans-Werner

Abstract

We combine a simple agent-based model of financial markets with a standard New Keynesian macroeconomic model via two straightforward channels. The result is a macroeconomic model that allows for the endogenous development of stock price bubbles. Even with such a simplistic comprehensive model, we can show that the behavioral foundations of the stock market exert important influence on the macroeconomy, e.g. they change the impulse-response functions of macroeconomic variables significantly. We also analyze financial market transaction taxes as well as asset price bubble deflating monetary policy, and find that both can be used to reduce volatility and distortion of the macroeconomic aggregates.

Suggested Citation

  • Lengnick, Matthias & Wohltmann, Hans-Werner, 2010. "Agent-based financial markets and New Keynesian macroeconomics: A synthesis," Economics Working Papers 2010-10, Christian-Albrechts-University of Kiel, Department of Economics.
  • Handle: RePEc:zbw:cauewp:201010
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    More about this item

    Keywords

    agent-based financial markets; New Keynesian macroeconomics; stock market; transaction tax; Taylor rule;
    All these keywords.

    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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