Financial Regulation in an Agent-Based Macroeconomomic Model

Posted: 29 Oct 2013

See all articles by Luca Riccetti

Luca Riccetti

Università degli Studi di Macerata

Alberto Russo

Università Politecnica delle Marche, Ancona - Department of Management

Mauro Gallegati

Università Politecnica delle Marche - Faculty of Economics

Date Written: October 25, 2013

Abstract

Starting from the agent-based decentralized matching macroeconomic model proposed in Riccetti et al. (2012), we explore the effects of banking regulation on macroeconomic dynamics. In particular, we study the overall credit exposure and the lending concentration towards a single counterparty, finding that the portfolio composition seems to be more relevant than the overall exposure for banking stability, even if both features are very important. We show that a too tight regulation is dangerous because it reduces credit availability. Instead, on one hand, too loose constraints could help banks to make money and to increase their net worth, thus making the constraints not binding. However, on the other hand, if bank profits are tied to higher payout ratio (as it really happened along the deregulation phase of the last 20 years), then the financial fragility increases causing a weaker economic environment (e.g., higher mean unemployment rate), a more volatile business cycle, and a higher probability of triggering financial crises. Accordingly, simulation results support the introduction of the Capital Conservation Buffer (Basel 3 reform).

Keywords: financial regulation, agent-based macroeconomics, business cycle, crisis, unemployment, leverage

JEL Classification: E32, C63

Suggested Citation

Riccetti, Luca and Russo, Alberto and Gallegati, Mauro, Financial Regulation in an Agent-Based Macroeconomomic Model (October 25, 2013). Available at SSRN: https://ssrn.com/abstract=2345904 or http://dx.doi.org/10.2139/ssrn.2345904

Luca Riccetti (Contact Author)

Università degli Studi di Macerata ( email )

via Crescimbeni
Macerata
Italy

HOME PAGE: http://docenti.unimc.it/luca.riccetti

Alberto Russo

Università Politecnica delle Marche, Ancona - Department of Management ( email )

Piazzale Martelli, 8
60121 Ancona
Italy

Mauro Gallegati

Università Politecnica delle Marche - Faculty of Economics ( email )

Piazzale Martelli, 8
60121 Ancona
Italy
++390712207188 (Phone)
++390712207102 (Fax)

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