An accommodating monetary policy followed by a sudden increase of the short term interest rate often leads to a bubble burst and to an economic slowdown. Through the implementation of an Agent Based Model with a financial accelerator mechanism we are able to study the relationship between monetary policy and large-scale crisis events. A two-step computational approach is proposed which performs (i) a pattern search of “double dip” episodes and (ii) counter-factual simulations implementing unconventional monetary policy. The main results can be summarized as follow: a) sudden and sharp increases of the policy rate can generate recessions; b) after a crisis, returning too soon and too quickly to a normal monetary policy regime can generate a “double dip” recession, while c) keeping the short term interest rate anchored to the zero lower bound in the short run can successfully avoid a further slowdown.

Monetary policy and large crises in a financial accelerator agent-based model / Giri, Federico; Riccetti, Luca; Russo, Alberto; Gallegati, Mauro. - In: JOURNAL OF ECONOMIC BEHAVIOR & ORGANIZATION. - ISSN 0167-2681. - STAMPA. - 157:(2019), pp. 42-58. [10.1016/j.jebo.2018.04.007]

Monetary policy and large crises in a financial accelerator agent-based model

Giri, Federico
;
Russo, Alberto;Gallegati, Mauro
2019-01-01

Abstract

An accommodating monetary policy followed by a sudden increase of the short term interest rate often leads to a bubble burst and to an economic slowdown. Through the implementation of an Agent Based Model with a financial accelerator mechanism we are able to study the relationship between monetary policy and large-scale crisis events. A two-step computational approach is proposed which performs (i) a pattern search of “double dip” episodes and (ii) counter-factual simulations implementing unconventional monetary policy. The main results can be summarized as follow: a) sudden and sharp increases of the policy rate can generate recessions; b) after a crisis, returning too soon and too quickly to a normal monetary policy regime can generate a “double dip” recession, while c) keeping the short term interest rate anchored to the zero lower bound in the short run can successfully avoid a further slowdown.
2019
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/11566/265898
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