Macroprudential Policy in a Heterogeneous Environment-An Application of Agent-Based Approach in Systemic Risk Modelling.

Jagoda Kaszowska-Mojsa,Mateusz Pipień

doi:10.3390/e22020129

Jagoda Kaszowska-Mojsa, Mateusz Pipień

Open Access

https://doi.org/10.3390/e22020129

Copy DOI

Abstract

Assessment of welfare effects of macroprudential policy seems the most important application of the Dynamic Stochastic General Equilibrium (DSGE) framework of macro-modelling. In particular, the DSGE-3D model, with three layers of default (3D), was developed and used by the European Systemic Risk Board and European Central Bank as a reference tool to formally model the financial cycle as well as to analyze effects of macroprudential policies. Despite the extreme importance of incorporating financial constraints in Real Business Cycle (RBC) models, the resulting DSGE-3D construct still embraces the representative agent idea, making serious analyses of diversity of economic entities impossible. In this paper, we present an alternative to DSGE modelling that seriously departs from the assumption of the representativeness of agents. Within an Agent Based Modelling (ABM) framework, we build an environment suitable for performing counterfactual simulations of the impact of macroprudential policy on the economy, financial system and society. We contribute to the existing literature by presenting an ABM model with broad insight into heterogeneity of agents. We show the stabilizing effects of macroprudential policies in the case of economic or financial distress.

Highlights

The new setting of financial supervision tailored after the global financial crisis of 2008–2009 has highlighted the need for research on the nature and measurement of risk in the financial system, called systemic risk [1,2,3,4]
In the European Union (EU), the implementing act of the Basel Agreements has been issued in the form of a new legislative package covering CRD IV/CRR (i.e., CRD IV Directive No 2013/36/EU on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms and CRR Regulation No 575/2013 on prudential requirements for credit institutions and investment firms)
The aim of this paper is to analyse the impact of selected macroprudential policy tools on the economic and financial system using agent-based modelling (ABM)

Summary

Introduction

The new setting of financial supervision tailored after the global financial crisis of 2008–2009 has highlighted the need for research on the nature and measurement of risk in the financial system, called systemic risk [1,2,3,4]. In response to the problems that occurred during the global financial crisis, the Basel III regulatory framework for financial institutions was adopted in 2010–2011. In the updated version of the Basel document the capital and liquidity requirements were established. Basel III was designed to strengthen the effects of banks’ capital requirements by increasing the liquidity of the banking sector and reducing leverage undertaken by banks. In the European Union (EU), the implementing act of the Basel Agreements has been issued in the form of a new legislative package covering CRD IV/CRR (i.e., CRD IV Directive No 2013/36/EU on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms and CRR Regulation No 575/2013 on prudential requirements for credit institutions and investment firms)

Objectives

Results

Conclusion