2024/08 | LEM Working Paper Series | ||||||||||||||||
Robust-less-fragile: Tackling Systemic Risk and Financial Contagion in a Macro Agent-Based Model |
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Gianluca Pallante, Mattia Guerini, Mauro Napoletano and Andrea Roventini |
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Keywords | |||||||||||||||||
Financial contagion, Systemic risk, Micro-prudential policy, Macro-prudential policy,
Macroeconomic stability, Agent-based computational economics
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JEL Classifications | |||||||||||||||||
C63, E32, E42, E58, G18
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Abstract | |||||||||||||||||
We extend the Schumpeter meeting Keynes (K+S; see Dosi et al., 2010,
2013, 2015) to model the emergence and the dynamics of an interbank
network in the money market. The extended model allows banks to
directly exchange funds, while evaluating their interbank positions
using a network- based clearing mechanism (NEVA, see Barucca et al.,
2020). These novel adds on, allow us to better measure financial
contagion and systemic risk events in the model and to study the
possible interactions between micro-prudential and macro-prudential
policies. We find that the model can replicate new stylized facts
concerning the topology of the interbank network, as well as the
dynamics of individual banks’ balance sheets. Policy results suggest
that the economic system at large can benefit from the introduction of
a micro-prudential regulation that takes into account the interbank
network relationships. Such a policy decreases the incidence of
systemic risk events and the bankruptcies of financial
institutions. Moreover, a trade-off between financial stability and
macroeconomic performance does not emerge in a two-pillar regulatory
framework grounded on i) a Basel III macro-prudential regulation and
ii) a NEVA-based micro-prudential policy. Indeed, the NEVA allows the
economic system to achieve financial stability without overly
stringent capital requirements.
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