Monetary Policy and Prudential Regulation in a Hybrid AB-SFC Model with Heterogeneous Expectations

Abstract

This paper explores the joint effects of prudential regulation and monetary policy in a hybrid agent-based-stock-flow-consistent model featuring an agent-based banking sector. The model is calibrated to a deterministic steady state and a subset of its free parameters are subsequently estimated empirically, producing a baseline simulation exhibiting persistent macroeconomic fluctuations. Experiments carried out on this baseline focus in particular on the expectations formation and forecasting mechanisms used by banks in their decision-making. The result is that simple heuristics are remarkably robust in the present model in that most alternative specifications produce little discernible difference in simulation outcomes. Subsequently a range of policy experiments are conducted, showing that a mix of monetary, prudential and fiscal policy is necessary to attenuate the macroeconomic volatility produced by the model.