Agent-based financial markets and New Keynesian macroeconomics: a synthesis

Regular Article

Abstract

We combine a simple agent-based model of financial markets and a New Keynesian macroeconomic model with bounded rationality via two straightforward channels. The result is a macroeconomic model that allows for the endogenous development of business cycles and stock price bubbles. We show that market sentiments exert important influence on the macroeconomy: Impulse-response functions of macroeconomic variables become more volatile which makes the effect of a given shock hard to predict. We also analyze the impact of different types of financial transaction taxes that are currently debated among policy makers (FTT, FAT, progressive FAT) and find that such taxes are well suited to stabilize the economy and raise funds from the financial sector as a contribution to the enormous costs created during the recent crisis. Our simulations suggest that the FTT leads to higher tax revenues and better stabilization results then the FAT. However, the FTT might also create huge distortion if set too high, a threat which the FAT does not imply.

Keywords

Agent-based modeling Stock market New Keynesian macroeconomics Financial transaction tax Financial activities tax 

JEL Classification

E0 E62 G01 G18 

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Copyright information

© Springer-Verlag 2012

Authors and Affiliations

  1. 1.Department of EconomicsUniversity of KielKielGermany

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