Taming Macroeconomic Instability: Monetary and Macro Prudential Policy Interactions in an Agent-Based Model

32 Pages Posted: 2 Jan 2016 Last revised: 7 Jun 2016

See all articles by Lilit Popoyan

Lilit Popoyan

Scuola Superiore Sant'Anna, Laboratory of Economics and Management (LEM)

Mauro Napoletano

Université de Nice Sophia Antipolis - Groupe de Recherche en Droit, Economie et Gestion (GREDEG); Observatoire Français des Conjonctures Economiques (OFCE); SKEMA Business School; Scuola Superiore Sant'Anna di Pisa - Laboratory of Economics and Management (LEM)

Andrea Roventini

Scuola Superiore Sant'Anna di Pisa - Laboratory of Economics and Management (LEM); Observatoire Français des Conjonctures Economiques (OFCE)

Date Written: January 2, 2016

Abstract

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.

Keywords: macro prudential policy; Basel III regulation; financial stability; monetary policy; agent-based computational economics

JEL Classification: C63, E52, E6, G01, G21, G28

Suggested Citation

Popoyan, Lilit and Napoletano, Mauro and Roventini, Andrea, Taming Macroeconomic Instability: Monetary and Macro Prudential Policy Interactions in an Agent-Based Model (January 2, 2016). Available at SSRN: https://ssrn.com/abstract=2710131 or http://dx.doi.org/10.2139/ssrn.2710131

Lilit Popoyan

Scuola Superiore Sant'Anna, Laboratory of Economics and Management (LEM) ( email )

Piazza Martiri Della Liberta 33
Pisa, Pisa 56127
Italy

Mauro Napoletano

Université de Nice Sophia Antipolis - Groupe de Recherche en Droit, Economie et Gestion (GREDEG) ( email )

250, rue Albert Einstein
Valbonne, 06560
France

Observatoire Français des Conjonctures Economiques (OFCE) ( email )

60, rue Dostoïevski
Sophia-Antipolis Cedex, 06902
France

HOME PAGE: http://www.ofce.sciences-po.fr

SKEMA Business School ( email )

60 rue Dostoïevski
Sophia Antipolis, 06902
France

Scuola Superiore Sant'Anna di Pisa - Laboratory of Economics and Management (LEM) ( email )

Piazza Martiri della Liberta, 33
Pisa, I-56127
Italy

Andrea Roventini (Contact Author)

Scuola Superiore Sant'Anna di Pisa - Laboratory of Economics and Management (LEM) ( email )

Piazza Martiri della Liberta', 33-I-56127
Pisa
Italy

Observatoire Français des Conjonctures Economiques (OFCE)

69 Quai d'Orsay
Paris 75004
France

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