Abstract
This paper presents a hybrid agent-based stock-flow-consistent model featuring heterogeneous banks, purposely built to examine the effects of variations in banks’ expectations formation and forecasting behaviour and to conduct policy experiments with a focus on monetary and prudential policy. The model is initialised to a deterministic stationary state and a subset of its free parameters are calibrated empirically in order to reproduce characteristics of UK macro-time-series data. Experiments carried out on the baseline focus on the expectations formation and forecasting behaviour of banks through allowing banks to switch between forecasting strategies and having them engage in least-squares learning. Overall, simple heuristics are remarkably robust in the model. In the baseline, which represents a relatively stable environment, the use of arguably more sophisticated expectations formation mechanisms makes little difference to simulation results. In a modified version of the baseline representing a less stable environment alternative heuristics may in fact be destabilising. To conclude the paper, a range of policy experiments is conducted, showing that an appropriate mix of monetary and prudential policy can considerably attenuate the macroeconomic volatility produced by the model.
Highlights
This paper presents a hybrid agent-based stock-flow-consistent model featuring heterogeneous banks, purposely built to examine the effects of variations in banks’ expectations formation and forecasting behaviour and to conduct policy experiments with a focus on monetary and prudential policy
This paper presents a hybrid agent-based stock-flow consistent (AB-SFC) macromodel with an agent-based banking sector
The hybrid model is constructed by fusing a macroeconomic stock-flow consistent model featuring households, firms, a government and a central bank with an agent-based banking sector which interacts with the aggregate portions of the model
Summary
This paper presents a hybrid agent-based stock-flow consistent (AB-SFC) macromodel with an agent-based banking sector. When implemented in a modified version of the baseline model representing a less stable environment, it turns out that varying the expectations formation mechanism of banks can have a strongly destabilising impact. It is shown that when banks use an alternative, arguably more sophisticated heuristic for setting their interest rates, this can produce inferior outcomes for them. These results are in line with existing research and the concept of ‘ecological rationality’ which emphasises that the fitness of behavioural rules is highly context-dependent. Online Appendix C contains a sensitivity analysis on the monetary policy rule as well as several parameters which are not included in the empirical calibration procedure
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have