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MONETARY POLICY AND DEBT DEFLATION: SOME COMPUTATIONAL EXPERIMENTS

Published online by Cambridge University Press:  05 April 2016

C. Chiarella  and
C. Di Guilmi
C. Chiarella
Affiliation:
University of Technology, Sydney
C. Di Guilmi*
Affiliation:
University of Technology, Sydney
*
Address correspondence to: Corrado Di Guilmi. Economics Discipline Group, University of Technology, Sydney, P.O. Box 123, Broadway, NSW 2007, Australia; e-mail: corrado.diguilmi@uts.edu.au.
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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 that includes the financial position of firms as a target. Monte Carlo simulations provide a representation of the complex feedback effects generated by the interaction among the different transmission channels of monetary policy. The model also reproduces the evidence of low inflation during stock market booms and shows how it can lead to overinvestment and destabilize the system. The paper also investigates the possible reasons behind this stylized fact by testing different behavioral rules for the central bank. We find that, in a context of sticky prices and volatile expectations, endogenous credit creation can be identified as the main source of the divergent dynamics of prices in the real and financial sectors.

Keywords

Financial FragilityMonetary PolicyDebt DeflationAgent-Based ModelingComplex Dynamics
Type
Articles
Information
Macroeconomic Dynamics , Volume 21 , Issue 1 , January 2017 , pp. 214 - 242
Copyright
Copyright © Cambridge University Press 2016 

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