Monetary policy and dark corners in a stylized agent-based model

Stanislao Gualdi (), Marco Tarzia, Francesco Zamponi and Jean-Philippe Bouchaud
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Stanislao Gualdi: École Centrale Paris
Marco Tarzia: Université Pierre et Marie Curie - Paris 6
Francesco Zamponi: Laboratoire de Physique Théorique
Jean-Philippe Bouchaud: CFM

Journal of Economic Interaction and Coordination, 2017, vol. 12, issue 3, No 3, 507-537

Abstract: Abstract We extend in a minimal way the stylized macroeconomic Agent-Based model introduced in our previous paper (Gualdi et al. in J Econ Dyn Control 50:29–61, 2015a), 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 rate. 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.

Date: 2017
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DOI: 10.1007/s11403-016-0174-z

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