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Stabilizing an unstable complex economy on the limitations of simple rules

Isabelle Salle () and Pascal Seppecher ()

Journal of Economic Dynamics and Control, 2018, vol. 91, issue C, 289-317

Abstract: This paper offers a systematic comparison of a wide range of leaning-against-the-wind interest-rate policy rules within a macroeconomic, stock-flow consistent, agent-based model. The model generates endogenous booms and busts along credit cycles. As feedback loops on aggregate demand affect the goods and the labor markets, the real and the financial sides of the economy are closely interconnected. The baseline scenario is able to qualitatively reproduce a wide range of stylized facts. We show that a monetary policy rule that targets the movements in the net worth of firms significantly dampens the credit cycles and reduces the employment costs of financial crises, because this indicator incorporates early signals of financial imbalances. Performances of this three-mandate Taylor rule are also more robust to the specific parameter values and regulatory framework than the standard dual-mandate Taylor rules. Nonetheless, none of the policy rules under study completely eliminates the high employment costs of financial crises.

Keywords: Leaning-against-the-wind; Credit cycles; Monetary and macroprudential policies; Agent-based modeling (search for similar items in EconPapers)
JEL-codes: E70 C63 E03 E52 (search for similar items in EconPapers)
Date: 2018
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Working Paper: Stabilizing an Unstable Complex Economy-On the limitations of simple rules (2017) Downloads
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DOI: 10.1016/j.jedc.2018.02.014

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