44 Pages Posted: 6 Apr 2016
Date Written: March 30, 2016
An accommodating monetary policy followed by a sudden increase of the short term interest rate often leads to a bubble burst and to an economic slowdown. Two examples are the Great Depression of 1929 and the Great Recession of 2008. Through the implementation of an Agent Based Model with a financial accelerator mechanism we are able to study the relationship between monetary policy and large scale crisis events. The main results can be summarized as follow: a) sudden and sharp increases of the policy rate can generate recessions; b) after a crisis, returning too soon and too quickly to a normal monetary policy regime can generate a "double dip" recession, while c) keeping the short term interest rate anchored to the zero lower bound in the short run can successfully avoid a further slowdown.
Keywords: Monetary Policy, Large Crises, Agent Based Model, Financial Accelerator, Zero Lower Bound
JEL Classification: E32, E44, E58, C63
Suggested Citation: Suggested Citation
Giri, Federico and Riccetti, Luca and Russo, Alberto and Gallegati, Mauro, Monetary Policy and Large Crises in a Financial Accelerator Agent-Based Model (March 30, 2016). Available at SSRN: https://ssrn.com/abstract=2758752