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Monetary Policy and Debt Deflation: Some Computational Experiments

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  • Carl Chiarella
  • Corrado Di Guilmi

Abstract

The paper presents an agent based model to study the possible effects of different fiscal and monetary policies in the context of debt deflation. We introduce a modified Taylor rule which includes the financial position of firms as a target. Monte Carlo simulations show that an excessive sensitivity of the central bank to inflation, the output gap and firms' debt can have undesired and destabilising effects on the system, while an active fiscal policy appears to be able to effectively stabilise the economy. The paper also addresses the puzzle of low inflation during stock market booms by testing different behavioural rules for the central bank. We find that, in a context of sticky prices and volatile expectations, endogenous credit can be identified as the main source of the divergent dynamics of prices in the real and financial sector.

Suggested Citation

  • Carl Chiarella & Corrado Di Guilmi, 2013. "Monetary Policy and Debt Deflation: Some Computational Experiments," CAMA Working Papers 2013-42, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    • Handle: RePEc:een:camaaa:2013-42
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    References listed on IDEAS

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    9. Chiarella Carl & Di Guilmi Corrado, 2012. "The Fiscal Cost of Financial Instability," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 16(4), pages 1-29, October.
    10. Di Guilmi, C. & Gaffeo, E. & Gallegati, M. & Palestrini, A., 2005. "International Evidence on Business Cycle Magnitude Dependence: An Analyisis of 16 Industrialized Countries, 1881-2000," International Journal of Applied Econometrics and Quantitative Studies, Euro-American Association of Economic Development, vol. 2(1), pages 5-16.
    11. Chiarella, Carl & Di Guilmi, Corrado, 2011. "The financial instability hypothesis: A stochastic microfoundation framework," Journal of Economic Dynamics and Control, Elsevier, vol. 35(8), pages 1151-1171, August.
    12. Gaffeo, Edoardo & Gallegati, Mauro & Palestrini, Antonio, 2003. "On the size distribution of firms: additional evidence from the G7 countries," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 324(1), pages 117-123.
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    Cited by:

    1. Salle, Isabelle & Seppecher, Pascal, 2018. "Stabilizing an unstable complex economy on the limitations of simple rules," Journal of Economic Dynamics and Control, Elsevier, vol. 91(C), pages 289-317.
    2. repec:hal:spmain:info:hdl:2441/1j4v8sl4fc9a49ankmnhv6bb6a is not listed on IDEAS
    3. Deryugina, Elena & Ponomarenko, Alexey & Rozhkova, Anna, 2020. "When are credit gap estimates reliable?," Economic Analysis and Policy, Elsevier, vol. 67(C), pages 221-238.
    4. Bardoscia, Marco & Carro, Adrian & Hinterschweiger, Marc & Napoletano, Mauro & Popoyan, Lilit & Roventini, Andrea & Uluc, Arzu, 2024. "The impact of prudential regulations on the UK housing market and economy: insights from an agent-based model," Bank of England working papers 1066, Bank of England.
    5. Isabelle Salle & Pascal Seppecher, 2017. "Stabilizing an Unstable Complex Economy," Working Papers hal-01527740, HAL.
    6. 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).
    7. Reissl, Severin, 2020. "Minsky from the bottom up – Formalising the two-price model of investment in a simple agent-based framework," Journal of Economic Behavior & Organization, Elsevier, vol. 177(C), pages 109-142.
    8. Michel Alexandre & Gilberto Tadeu Lima, 2020. "Combining monetary policy and prudential regulation: an agent-based modeling approach," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 15(2), pages 385-411, April.
    9. Corrado Di Guilmi, 2017. "The Agent†Based Approach To Post Keynesian Macro†Modeling," Journal of Economic Surveys, Wiley Blackwell, vol. 31(5), pages 1183-1203, December.
    10. Guilmi, Corrado Di & Fujiwara, Yoshi, 2022. "Dual labor market, financial fragility, and deflation in an agent-based model of the Japanese macroeconomy," Journal of Economic Behavior & Organization, Elsevier, vol. 196(C), pages 346-371.
    11. Carl Chiarella & Corrado Di Guilmi, 2014. "Financial instability and debt deflation dynamics in a bottom-up approach," Economics Bulletin, AccessEcon, vol. 34(1), pages 125-132.

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    More about this item

    Keywords

    Financial fragility; monetary policy; debt deflation; agent based modelling; complex dynamics.;
    All these keywords.

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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