Monetary Policy and Debt Deflation: Some Computational Experiments

Carl Chiarella and Corrado Di Guilmi

No 10, Working Paper Series from Economics Discipline Group, UTS Business School, University of Technology, Sydney

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.

Keywords: Financial fragility; monetary policy; debt deflation; agent based modelling; complex dynamics (search for similar items in EconPapers)
JEL-codes: E12 E31 E44 (search for similar items in EconPapers)
Pages: 27
Date: 2013-06-01
New Economics Papers: this item is included in nep-cba, nep-cmp, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: MONETARY POLICY AND DEBT DEFLATION: SOME COMPUTATIONAL EXPERIMENTS (2017)
Working Paper: Monetary Policy and Debt Deflation: Some Computational Experiments (2013)
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