Integrating Real and Financial Markets in an Agent-Based Economic Model: An Application to Monetary Policy Design
- 226 Downloads
This article presents an agent-based integrated model of a real, financial, and monetary economy. The model is characterized by a monopolist firm that supplies a single homogeneous product in the goods market, hires workers in the labor market, and demands loans in the credit market; a trade union that sets the nominal wage; N heterogeneous households that buy the consumption good, provide the labor force, and trade the firm’s equity in the stock market; and a bank that lends money to the firm at an interest rate set according to a monetary policy strategy. The model is used to perform monetary policy experiments. A monetary policy rule which targets the gap between the current output and the potential output in the full employment case is investigated, studying the effects on the economy for different degrees of policy tightness. The monetary policy rule is compared to a random policy rule that conserves a similar structure. Results show that a tight monetary policy clearly over performs the random policy rule. Moreover, results corroborate the effectiveness of monetary policy in limiting inflation and increasing welfare.
KeywordsAgent-based computational economics Monetary policy design Financial markets and the macroeconomy
JEL classificationsC63 E44 E52
Unable to display preview. Download preview PDF.
- Bruun, C. (1999). Agent-based Keynesian economics: simulating a monetary production system bottom-up. University of Aaborg.Google Scholar
- Clarida M.G.R. and Gali J. (1999). The science of monetary policy: a new keynesian perspective. Journal of Economic Literature 37(4): 1661–1707 Google Scholar
- LeBaron, B. D. (2006). Agent-based computational finance. In Handbook of computational economics (Vol. 2). North Holland.Google Scholar
- Mankiw, N. G., & Romer, D. (Eds.) (1991). New Keynesian economics. MIT Press.Google Scholar
- Raberto, M., Teglio, A., & Cincotti, S. (2007). Monetary policy experiments in an artificial multi-market economy with reservation wages. In A. Consiglio (Ed) Artificial Markets Modeling. Methods and Applications, (pp. 33–46). Lecture Notes in Economics and Mathematical Systems. Berlin, Heidelberg: Springer Verlag.Google Scholar
- Sallans, B., Pfister, A., Karatzoglou, A., & Dorffner, G. (2003). Simulations and validation of an integrated markets model. Journal of Artificial Societies and Social Simulation, 6(4).Google Scholar
- Taylor, J. B. (1993). Discretion versus policy rule in practice. In Carnegie-Rochester conference series on public policy (Vol. 39), pp. 195–214.Google Scholar
- Tesfatsion, L., & Judd, K. (2006). Agent-based computational economics. In Handbook of computational economics (Vol. 2). North Holland.Google Scholar
- Woodford, M. (2003). Interest & prices. Princeton University Press.Google Scholar