Monetary Policy and Dark Corners in a stylized Agent-Based Model

Abstract : We generalise the stylised macroeconomic Agent-Based model introduced in our previous paper [1], with the aim of investigating the role and efficacy of monetary policy of a 'Central Bank', that sets the interest rate such as to steer the economy towards a prescribed inflation and employment level. Our major finding is that provided its policy is not too aggressive (in a sense detailed in the paper) the Central Bank is successful in achieving its goals. However, the existence of different equilibrium states of the economy, separated by phase boundaries (or " dark corners "), can cause the monetary policy itself to trigger instabilities and be counter-productive. In other words, the Central Bank must navigate in a narrow window: too little is not enough, too much leads to instabilities and wildly oscillating economies. This conclusion strongly contrasts with the prediction of DSGE models.
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Submitted on : Thursday, September 22, 2016 - 11:27:07 AM
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Stanislao Gualdi, Marco Tarzia, Francesco Zamponi, Jean-Philippe Bouchaud. Monetary Policy and Dark Corners in a stylized Agent-Based Model. Journal of Economic Interaction and Coordination, Springer Verlag, 2016, 12 (3), pp.507-537. ⟨10.1007/s11403-016-0174-z⟩. ⟨hal-01370217⟩

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