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Monetary Policy and Large Crises in a Financial Accelerator Agent-Based Model

44 Pages Posted: 6 Apr 2016  

Federico Giri

Università Politecnica delle Marche

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: March 30, 2016

Abstract

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

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

Federico Giri (Contact Author)

Università Politecnica delle Marche ( email )

Piazzale Martelli 8
Ancona, 18039
Italy

Luca Riccetti

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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