2015/33 | LEM Working Paper Series | ||||||||||||||||
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Taming Macroeconomic Instability: Monetary and Macro Prudential Policy Interactions in an Agent-Based Model |
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Lilit Popoyan, Mauro Napoletano and Andrea Roventini |
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Keywords | |||||||||||||||||
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macro prudential policy; Basel III regulation; financial stability; monetary policy; agent-based computational economics
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JEL Classifications | |||||||||||||||||
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C63, E52, E6, G01, G21, G28
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Abstract | |||||||||||||||||
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We develop an agent-based model to study the macroeconomic impact of
alternative macro prudential regulations and their possible
interactions with different monetary policy rules. The aim is to shed
light on the most appropriate policy mix to achieve the resilience of
the banking sector and foster macroeconomic stability. Simulation
results show that a triple-mandate Taylor rule, focused on output
gap, inflation and credit growth, and a Basel III prudential regulation
is the best policy mix to improve the stability of the banking sector
and smooth output fluctuations. Moreover, we consider the different levers
of Basel III and their combinations. We find that minimum capital
requirements and counter-cyclical capital buffers allow to achieve
results close to the Basel III first-best with a much more simplified
regulatory framework. Finally, the components of Basel III are
non-additive: the inclusion of an additional lever does not always
improve the performance of the macro prudential regulation.
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