Monetary Policy and Dark Corners in a stylized Agent-Based Model

TL;DR

This paper extends a stylized agent-based macroeconomic model to analyze how central bank interest rate policies can successfully achieve inflation and employment targets, but may also induce instabilities due to multiple equilibria.

Contribution

It introduces a minimal extension to an existing agent-based model to study monetary policy effects and highlights the risks of policy-induced instabilities near phase boundaries.

Findings

Successful policy requires careful calibration to avoid instabilities.

Multiple equilibrium states can be triggered by monetary policy.

Aggressive policies may lead to oscillating economies.

Abstract

We extend in a minimal way the stylized model introduced in in "Tipping Points in Macroeconomic Agent Based Models" [JEDC 50, 29-61 (2015)], with the aim of investigating the role and efficacy of monetary policy of a `Central Bank' that sets the interest rate such as to steer the economy towards a prescribed inflation and employment level. Our major finding is that provided its policy is not too aggressive (in a sense detailed in the paper) the Central Bank is successful in achieving its goals. However, the existence of different equilibrium states of the economy, separated by phase boundaries (or "dark corners"), can cause the monetary policy itself to trigger instabilities and be counter-productive. In other words, the Central Bank must navigate in a narrow window: too little is not enough, too much leads to instabilities and wildly oscillating economies. This conclusion strongly contrasts with the prediction of DSGE models.