Monetary Policy and Debt Deflation: Some Computational Experiments

CAMA Working Paper 42/2013, July 2013

FIRN Research Paper

28 Pages Posted: 4 Jul 2013

See all articles by Carl Chiarella

Carl Chiarella

University of Technology, Sydney - UTS Business School, Finance Discipline Group

Corrado Di Guilmi

University of Technology Sydney (UTS) - UTS Business School

Date Written: July 2, 2013

Abstract

The paper presents an agent based model to study the possible effects of different fiscal and monetary policies in the context of debt deflation. We introduce a modified Taylor rule which includes the financial position of firms as a target. Monte Carlo simulations show that an excessive sensitivity of the central bank to inflation, the output gap and firms’ debt can have undesired and destabilising effects on the system, while an active fiscal policy appears to be able to effectively stabilise the economy. The paper also addresses the puzzle of low inflation during stock market booms by testing different behavioural rules for the central bank. We find that, in a context of sticky prices and volatile expectations, endogenous credit can be identified as the main source of the divergent dynamics of prices in the real and financial sector.

Keywords: Financial fragility, monetary policy, debt deflation, agent based modelling, complex dynamics

JEL Classification: E12, E31, E44

Suggested Citation

Chiarella, Carl and Di Guilmi, Corrado, Monetary Policy and Debt Deflation: Some Computational Experiments (July 2, 2013). CAMA Working Paper 42/2013, July 2013, FIRN Research Paper, Available at SSRN: https://ssrn.com/abstract=2289588 or http://dx.doi.org/10.2139/ssrn.2289588

Carl Chiarella

University of Technology, Sydney - UTS Business School, Finance Discipline Group ( email )

PO Box 123
Broadway, NSW 2007
Australia
+61 2 9514 7719 (Phone)
+61 2 9514 7711 (Fax)

HOME PAGE: http://www.business.uts.edu.au/finance/

Corrado Di Guilmi (Contact Author)

University of Technology Sydney (UTS) - UTS Business School ( email )

Sydney
Australia

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