Monetary Policy and Prudential Regulation in a Hybrid AB-SFC Model with Heterogeneous Expectations

ExSIDE Working Paper Series, No. 08-2018

60 Pages Posted: 26 Dec 2018

See all articles by Severin Reissl

Severin Reissl

Institute of Advanced Study (IUSS - Pavia)

Date Written: December 1, 2018

Abstract

This paper explores the joint effects of prudential regulation and monetary policy in a hybrid agent-based-stock-flow-consistent model featuring an agent-based banking sector. The model is calibrated to a deterministic steady state and a subset of its free parameters are subsequently estimated empirically, producing a baseline simulation exhibiting persistent macroeconomic fluctuations. Experiments carried out on this baseline focus in particular on the expectations formation and forecasting mechanisms used by banks in their decision-making. The result is that simple heuristics are remarkably robust in the present model in that most alternative specifications produce little discernible difference in simulation outcomes. Subsequently a range of policy experiments are conducted, showing that a mix of monetary, prudential and fiscal policy is necessary to attenuate the macroeconomic volatility produced by the model.

Keywords: Stock-Flow Consistent Models, Agent-Based Models, Monetary Policy, Prudential Policy, Heterogeneous Expectations

JEL Classification: E12, E52, E58, E61, G28

Suggested Citation

Reissl, Severin, Monetary Policy and Prudential Regulation in a Hybrid AB-SFC Model with Heterogeneous Expectations (December 1, 2018). ExSIDE Working Paper Series, No. 08-2018, Available at SSRN: https://ssrn.com/abstract=3297506 or http://dx.doi.org/10.2139/ssrn.3297506

Severin Reissl (Contact Author)

Institute of Advanced Study (IUSS - Pavia) ( email )

Italy

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