the dynamics of the leverage cycle abstract we present a simple agent based model of a financial system composed of leveraged investors such as banks that invest in stocks and manage their risk using a value at risk constraint based on historical observations of asset prices the value at risk constraint implies that when perceived risk is low leverage is high and vice versa a phenomenon that has been dubbed pro cyclical leverage we show that this leads to endogenous irregular oscillations in which gradual increases in stock prices and leverage are followed by drastic market collapses i e a leverage cycle this phenomenon is studied using simplified models that give a deeper understanding of the dynamics and the nature of the feedback loops and instabilities underlying the leverage cycle we introduce a flexible leverage regulation policy in which it is possible to continuously tune from pro cyclical to countercyclical leverage when the policy is sufficiently countercyclical and bank risk is sufficiently low the endogenous oscillation disappears and prices go to a fixed point while there is always a leverage ceiling above which the dynamics are unstable countercyclical leverage policies can be used to raise the ceiling we also study the impact on leverage cycles of direct temporal control of the bank s riskiness via the bank s required value at risk quantile under such a rule the regulator relaxes the value at risk quantile following a negative stock price shock and tightens it following a positive shock while such a policy rule can reduce the amplitude of leverage cycles its effectiveness is highly dependent on the choice of parameters finally we investigate fixed limits on leverage and show how they can control the leverage cycle

taming macroeconomic instability monetary and macro prudential policy interactions in an agent based model abstract we develop an agent based model to study the macroeconomic impact of alternative macro prudential regulations and their possible interactions with different monetary policy rules the aim is to shed light on the most appropriate policy mix to achieve the resilience of the banking sector and foster macroeconomic stability simulation results show that a triple mandate taylor rule focused on output gap inflation and credit growth and a basel iii prudential regulation is the best policy mix to improve the stability of the banking sector and smooth output fluctuations moreover we consider the different levers of basel iii and their combinations we find that minimum capital requirements and counter cyclical capital buffers allow to achieve results close to the basel iii first best with a much more simplified regulatory framework finally the components of basel iii are non additive the inclusion of an additional lever does not always improve the performance of the macro prudential regulation

interjurisdictional spillovers decentralized policymaking and the elasticity of capital supply a key question in the fiscal federalism literature is whether decentralized policymaking in an economy with spillovers among jurisdictions leads to an efficient outcome see e g oates 1972 a striking example where this question is of particular importance is the current debate on global warming the failure of the copenhagen summit in late 2009 has shown impressively that centralized solutions to the climate change problem are hard to realize one might thus want to know whether a decentralized policy approach where each country chooses its own climate policy without coordinating it with the climate policy of other countries gives hope for an efficient policy outcome further important examples of decentralized decision making in the presence of interjurisdictional spillover effects can be found in the decentralized provision of education and infrastructure at first glance it is hardly imaginable that decentralized policymaking can ever be optimal it is not only the very existence of spillovers that causes doubt the policy instruments themselves also create policy externalities despite this presumption against the efficiency of decentralized policymaking the previous literature provides several studies in which decentralization leads to an undistorted policy choice an important example is the paper of oates and schwab 1988 who argue that the choice of capital taxes in an economy with identical jurisdictions mobile capital and local pollution may indeed be efficient in a remarkable recent paper ogawa and wildasin 2009 extend the analysis to account for transboundary pollution spillovers and asymmetric countries and still get the efficiency result in their model emissions and thus the extent of spillovers generated by a jurisdiction is proportional to capital employed in this jurisdiction the choice of capital taxes is then distorted by the jurisdictions incentives for tax competition and by the jurisdictions disregard of spillover effects but the key argument is that both distortions just neutralize each other and thereby lead to efficient capital tax rates our paper contributes to this literature and points to the important role that the elasticity of aggregate capital supply with respect to the net rate of return to capital plays for the efficiency of decentralized policymaking in accordance with the previous literature we show that under a fixed capital supply zero capital supply elasticity the decentralized policy choice is indeed optimal if the capital supply elasticity is strictly positive however capital tax rates are inefficiently low in the decentralized

quantifying structural subsidy values for systemically important financial institutions abstract claimants to systemically important financial institutions sifis would receive transfers when governments are forced into bailouts ex ante this bailout expectation lowers sifis daily funding costs the funding cost advantage reflects both the structural level of the government support and the time varying market valuation for such a support based on a large worldwide sample of banks we estimate the value of the structural subsidy by exploiting expectations of state support embedded in credit ratings and by applying the long run average value of the rating bonus the value of the structural subsidy was already sizable 60 basis points bp as of the end 2007 before the crisis it increased to 80 bp by the end 2009

optimal bank capital this article reports estimates of the long run costs and benefits of having banks fund more of their assets with loss absorbing capital or equity we model how shifts in funding affect required rates of return and how costs are influenced by the tax system we draw a clear distinction between costs to individual institutions private costs and overall economic or social costs we find that the amount of equity capital that is likely to be desirable for banks to use is very much larger than banks have used in recent years and also higher than targets agreed under the basel iii framework this article reports estimates of the long run costs and benefits of having banks fund more of their assets with loss absorbing capital by which we mean equity rather than debt the benefits come because a larger buffer of truly loss absorbing capital reduces the chance of banking crises which as both past history and recent events show generate substantial economic costs the offset to any such benefits comes in the form of potentially higher costs of intermediation of saving through the banking system the cost of funding bank lending might rise as equity replaces debt and such costs can be expected to be reflected in a higher interest rate charged to those who borrow from banks that in turn would tend to reduce the level of investment with potentially long lasting effects on the level of economic activity calibrating the size of these costs and benefits is important but far from

rational heuristics expectations and behaviors in evolving economies with heterogeneous interacting agents we analyze the individual and macroeconomic impacts of heterogeneous expectations and action rules within an agent based model populated by heterogeneous interacting firms agents have to cope with a complex evolving economy characterized by deep uncertainty resulting from technical change imperfect information coordination hurdles and structural breaks in these circumstances we find that neither individual nor macroeconomic dynamics improve when agents replace myopic expectations with less naive learning rules our results suggest that fast and frugal robust heuristics may not be a second best option but rather rational responses in complex and changing macroeconomic environments jel c63 d8 e32 e6 o4

managerial overconfidence in initial public offering decisions and its impact on macrodynamics and financial stability analysis using an agent based model abstract in this study we build a macroeconomic agent based model that is calibrated for the specific case of poland to explore whether the overconfidence of top corporate managers in the context of their initial public offering ipo decisions is detrimental for the firms being managed in this way the financial market dynamics and the selected macroeconomic indicators we found a contradiction between the micro and macro impacts of overconfidence overconfident firms showed better performance in terms of output than other firms but were also more exposed to stock market volatility thereby making them more likely to default the higher default rates of overoptimistic firms negatively impacted the banking sector and increased financial instability finally we ran policy shocks and showed that increased financial instability can be offset by strengthening the regulation of the banking sector

dichotomy between macroprudential policy and monetary policy on credit and inflation this paper compares macroprudential policy and monetary policy using a simple new keynesian model with credit macroprudential policy is effective in stabilizing credit with limited impact on inflation monetary policy stabilizes inflation but is too blunt for credit stabilization

assessing the impact of macroprudential measures this letter attempts to assess the potential impact of implementing the recently proposed proportionate loan tovalue ratio on the wider housing market using a dual micro and macro simulation strategy we find evidence for some moderate negative impacts of the ltv cap on house prices and mortgage interest rates with a proportionately larger impact on housing supply these can however be considered to be close to the maximum possible impacts given the conservative assumptions and empirical strategies underlying our analysis

think locally act locally spillovers spillbacks and efficient decentralized policymaking we analyze models with interjurisdictional spillovers among heterogeneous jurisdictions such as co 2 emissions that affect the global environment each jurisdiction s emissions depend upon the local stock of capital which is interjurisdictionally mobile and subject to local taxation in important cases decentralized policymaking leads to efficient resource allocation even in the complete absence of corrective interventions by higher level governments or coordination of policy through coasian bargaining in particular even when the preferences and production technologies differ among the agents the decentralized system can result in globally efficient allocation

an interdisciplinary model for macroeconomics macroeconomic modelling has been under intense scrutiny since the great financial crisis when serious shortcomings were exposed in the methodology used to understand the economy as a whole criticism has been levelled at the assumptions employed in the dominant models particularly that economic agents are homogeneous and optimizing and that the economy is equilibrating this paper seeks to explore an interdisciplinary approach to macroeconomic modelling with techniques drawn from other natural and social sciences specifically it discusses agent based modelling which is used across a wide range of disciplines as an example of such a technique agent based models are complementary to existing approaches and are suited to answering macroeconomic questions where complexity heterogeneity networks and heuristics play an important role

the effects of interbank networks on efficiency and stability in a macroeconomic agent based model we develop a macroeconomic agent based model that consists of firms banks unions and households who interact on labour goods credit and interbank markets the model endogenises pricing decisions by firms wage setting by unions and interest rate setting by banks on both firm and interbank lending banks also set leverage targets and precautionary liquidity buffers on the basis of internal risk models our model produces endogenous fluctuations driven by the pricing behaviour of firms and the wage setting behaviour of unions fluctuations lead to loan defaults which are exacerbated as lenders reduce lending and charge higher interest rates inducing a credit crunch we also study how making the inter banking network more connected affects the key outcomes of the economy and find that while the flow of funds from surplus banks to firms can be increased the latter effect is soon dominated by increasing instability in the real sector as firms default at higher rates while the banking sector experiences fewer defaults as a whole losses on the interbank market increase as a source of bank defaults

fiscal and monetary policies in complex evolving economies what is the most appropriate combination of fiscal and monetary policies in economies subject to banking crises and deep recessions we study this issue using an agent based model that is able to reproduce a wide array of macro and micro empirical regularities simulation results suggest that policy mixes associating unconstrained counter cyclical fiscal policy and monetary policy targeting employment is required to stabilise the economy we also show that discipline guided fiscal rules can be self defeating as they depress the economy without improving public finances finally we find that the effects of monetary and fiscal policies become sharper as the level of income inequality increases

beyond dsge models toward an empirically based macroeconomics david colander has been writing about economic methodology for over 30 years but he goes out of his way to emphasize that he does not see himself as a methodologist his pragmatic methodology is applicable to what economists are doing and attempts to answer questions that all economists face as they go about their work the articles collected in this volume are divided with the first part providing a framework underlying colander s methodology and introducing colander s methodology for economic policy within that framework part two presents colander s view on the methodology for microeconomics while part three looks at colander s methodology for macroeconomics the book closes with discussions of broader issues this abstract was borrowed from another version of this item

climate change financial stability and monetary policy using a stock flow fund ecological macroeconomic model we analyse i the effects of climate change on financial stability and ii the financial and global warming implications of a green qe programme emphasis is placed on the impact of climate change damages on the price of financial assets and the financial position of firms and banks the model is estimated and calibrated using global data and simulations are conducted for the period 2015 2115 four key results arise first by destroying the capital of firms and reducing their profitability climate change is likely to gradually deteriorate the liquidity of firms leading to a higher rate of default that could harm both the financial and the non financial corporate sector second climate change damages can lead to a portfolio reallocation that can cause a gradual decline in the price of corporate bonds third financial instability might adversely affect credit expansion and the investment in green capital with adverse feedback effects on climate change fourth the implementation of a green qe programme can reduce climate induced financial instability and restrict global warming the effectiveness of this programme depends positively on the responsiveness of green investment to changes in bond yields

does macro prudential regulation leak evidence from a uk policy experiment the regulation of bank capital as a means of smoothing the credit cycle is a central element of forthcoming macro prudential regimes internationally for such regulation to be effective in controlling the aggregate supply of credit it must be the case that i changes in capital requirements affect loan supply by regulated banks and ii unregulated substitute sources of credit are unable to offset changes in credit supply by affected banks this paper examines micro evidence lacking to date on both questions using a unique data set in the uk regulators have imposed time varying bank specific minimum capital requirements since basel i it is found that regulated banks uk owned banks and resident foreign subsidiaries reduce lending in response to tighter capital requirements but unregulated banks resident foreign branches increase lending in response to tighter capital requirements on a relevant reference group of regulated banks this leakage is substantial amounting to about one third of the initial impulse from the regulatory change

automakers short run responses to changing gasoline prices abstract we provide empirical evidence that automobile manufacturers use cash incentives to offset how gasoline price fluctuations affect the expected fuel expenses of automobile buyers regressions based on a database of incentives over 2003 to 2006 suggest that on average manufacturers offset 40 of the change in relative fuel costs between vehicles due to gasoline price fluctuations the results highlight that carbon taxes and emissions trading programs likely would generate substantial substitution within vehicle classes and studies that ignore manufacturer discounting likely underestimate consumer demand for fuel economy the results also have implications for the optimal design of feebate programs

jointly produced exhaustible resources abstract natural resources are often produced jointly from composite ores which in turn are extracted from fixed reserve endowments in this paper market behavior is examined for such resources and it is shown how the price of each resource will depend on its demand and the demands and storage costs for the other resources present in the ore the measurement of resource scarcity is discussed and the effects of uncertainty over future resource demands are examined it is shown that the competitive market will still extract produce and store at socially optimal rates if firms are risk neutral and the average cost of storage is constant policy implications are noted particularly with reference to government stockpiling programs

international trade and the environment policy reform in a polluted small open economy abstract this paper investigates sufficient conditions for welfare improving policy reforms in a small open economy facing many trade and pollution distortions we investigate and compare reform in tax regimes quota regimes and mixed regimes where some pollutants are regulated with taxes and others with quotas it is also shown that the welfare benefits of reforming pollution policy are greater in an economy with international factor mobility than in an economy not subject to such mobility

leverage induced systemic risk under basle ii and other credit risk policies abstract we use a simple agent based model of value investors in financial markets to test three credit regulation policies the first is the unregulated case which only imposes limits on maximum leverage the second is basle ii and the third is a hypothetical alternative in which banks perfectly hedge all of their leverage induced risk with options when compared to the unregulated case both basle ii and the perfect hedge policy reduce the risk of default when leverage is low but increase it when leverage is high this is because both regulation policies increase the amount of synchronized buying and selling needed to achieve deleveraging which can destabilize the market none of these policies are optimal for everyone risk neutral investors prefer the unregulated case with low maximum leverage banks prefer the perfect hedge policy and fund managers prefer the unregulated case with high maximum leverage no one prefers basle ii

modeling macroeconomies as open ended dynamic systems of interacting agents uall models are wrong but some are useful g e p box 1979 macroeconomists seek to understand the structure and performance of economies at a national or regional level and the manner in which government policymakers attempt to influence this structure and performance over time such understanding would seem to require a systematic exploration of the intricate feedback loops connecting micro behaviors interaction patterns and macro regularities as observed in real world economies

intergenerational income mobility in the united states social scientists and policy analysts have long expressed concern about the extent of intergenerational income mobility in the united states but remarkably little empirical evidence is available the few existing estimates of the intergenerational correlation in income have been biased downward by measurement error unrepresentative samples or both new estimates based on intergenerational data from the panel study of income dynamics imply that the intergenerational correlation in long run income is at least 0 4 indicating dramatically less mobility than suggested by earlier research copyright 1992 by american economic association

the intergenerational transmission of automobile brand preferences we document a strong correlation in the brand of automobile chosen by parents and their adult children using data from the panel study of income dynamics this correlation could represent transmission of brand preferences across generations or it could result from correlation in family characteristics that determine brand choice we present a variety of empirical specifications that lend support to the former interpretation and to a mechanism that relies at least in part on state dependence we then discuss implications of intergenerational brand preference transmission for automakers product line strategies and for the strategic pricing of vehicles to different age groups

variable returns to scale urban unemployment and welfare the proposition that free trade is superior to no trade has a classical ancestry adam smith and ricardo were amongst the first proponents of free trade samuelson 26 proved and it is held by economists today that free trade is the optimal policy in the presence of standard paretoconditions it is also generally agreed amongst economists that lower trade intervention is superior to higher trade intervention given competitive conditions in a small country these propositions do not hold however in the presence of factor market imperfections such as wage differentials in a small country and therefore production or wage subsidies improves social welfare the two models which are generally used to investigate the positive as well as normative aspects of trade theory in the presence of unemployment are the uniform real minimum wage model which is based on the assumption of general rigidity of real wage in one or two sectors of production and the sector specific minimum wage model which focuses on the phenomenon of rural urban migration in the face of large scale urban unemployment these two models are commonly utilized by trade theorists to analyze trade and unemployment specifically studies by haberler 13 johnson 16 batra and seth 3 findlay 12 and brecher 6 7 investigate the consequences of rigid factor prices for a small country whereas the normative as well as positive aspects of sector specific unemployment have been explored by harris and todaro 15 bhagwati and srinivasan 4 5 and more recently by batra and naqvi 2 das 10 and kahn 19 it has been correctly observed that the introduction of an exogenously specified real minimum wage among other things generates unorthodox results concerning unemployment and gains from trade a large body of research has also been concerned with the welfare implications of different commercial policies in the context of variable returns to scale kemp and negishi 20 have pointed out the beneficial effects of trade in the presence of variable returns to scale production subsidy and consumption taxes eaton and panagariya 11 have analyzed the question of gains from trade in the presence of variable returns to scale and in the context of pareto welfare criterion whereas choi and yu 8 have examined the welfare implications of tariffs and consumption taxes as well as the welfare rankings of these policies under variable returns to scale while panagariya and succar 25 have modified the necessary and sufficient conditions for stability under increasing returns to scale in urban sector

income distribution credit and fiscal policies in an agent based keynesian model this work studies the interactions between income distribution and monetary and fiscal policies in terms of ensuing dynamics of macro variables gdp growth unemployment etc on the grounds of an agent based keynesian model the direct ancestor of this work is the keynes meeting schumpeter formalism presented in dosi et al 2010 to that model we add a banking sector and a monetary authority setting interest rates and credit lending conditions the model combines keynesian mechanisms of demand generation a schumpeterian innovation fueled process of growth and minskian credit dynamics the robustness of the model is checked against its capability to jointly account for a large set of empirical regularities both at the micro level and at the macro one the model is able to catch salient features underlying the current as well as previous recessions the impact of financial factors and the role in them of income distribution we find that different income distribution regimes heavily affect macroeconomic performance more unequal economies are exposed to more severe business cycles fluctuations higher unemployment rates and higher probability of crises on the policy side fiscal policies do not only dampen business cycles reduce unemployment and the likelihood of experiencing a huge crisis in some circumstances they also affect positively long term growth further the more income distribution is skewed toward profits the greater the effects of fiscal policies about monetary policy we find a strong non linearity in the way interest rates affect macroeconomic dynamics in one regime with low rates changes in interest rates are ineffective up to a threshold beyond which increasing the interest rate implies smaller output growth rates and larger output volatility unemployment and likelihood of crises

getting at systemic risk via an agent based model of the housing market systemic risk must include the housing market though economists have not generally focused on it we begin construction of an agent based model of the housing market with individual data from washington dc twenty years of success with agent based models of mortgage prepayments give us hope that such a model could be useful preliminary analysis suggests that the housing boom and bust of 1997 2007 was due in large part to changes in leverage rather than interest rates

why do rich countries prefer free trade over free migration the role of the modern welfare state abstract according to traditional trade theory heckscher ohlin free trade and free migration are equivalent measures of economic integration leading both to an equalization of factor prices this prediction is in sharp opposition to the observed preference of rich countries for free trade over free migration we provide an explanation for this inconsistency the redistribution policies in the countries social welfare in countries with a relatively small number of low skilled native workers is higher with free trade than with free migration due to redistribution of income towards immigrating workers

leaning against boom bust cycles in credit and housing prices this paper studies the potential gains of monetary and macro prudential policies that lean against house price and credit cycles we rely on a model that features borrowers and savers and allows for over borrowing induced by news shock driven cycles we find that policy that responds to changes in financial variables is socially optimal considering the use of a single policy instrument both types of agents are better off when the interest rate optimally responds to credit growth when we allow for the implementation of both interest rate and ltv policies heterogeneity in the welfare implications is key in determining the optimal use of policy instruments the optimal policy for the borrowers is characterized by a ltv ratio that responds countercyclically to credit growth which most effectively stabilizes credit relative to gdp in contrast the optimal policy for the savers features a constant ltv ratio coupled with an interest rate response to credit growth news shock driven cycles account for most of the gains from a policy response to changes in financial variables

a new approach to business fluctuations heterogeneous interacting agents scaling laws and financial fragility abstract in this paper we discuss a scaling approach to business fluctuations our starting point consists in recognizing that concepts and methods derived from physics have allowed economists to re discover a set of stylized facts which have to be satisfactorily accounted for in their models standard macroeconomics based on a reductionist approach centered on the representative agent is definitely badly equipped for this task on the contrary we show that a simple financial fragility agent based model based on complex interactions of heterogeneous agents is able to replicate a large number of scaling type stylized facts with a remarkable high degree of statistical precision

facts and challenges from the great recession for forecasting and macroeconomic modeling this paper provides a survey of business cycle facts updated to take account of recent data emphasis is given to the great recession which was unlike most other postwar recessions in the united states in being driven by deleveraging and financial market factors we document how recessions with financial market origins are different from those driven by supply or monetary policy shocks this helps explain why economic models and predictors that work well at some times do poorly at other times we discuss challenges for forecasters and empirical researchers in light of the updated business cycle facts

the emergence of economic organization abstract a model of decentralized markets is studied in which transactors follow simple adaptive rules transactions are coordinated by specialist trading firms that bear the costs of market disequilibrium starting from an initially autarkic situation in which none of the institutions that support exchange exist computer simulation shows that for a wide range of parameter values a fully developed market economy will emerge spontaneously moreover in virtually every case where a market economy develops one of the commodities traded will emerge as a universal medium of exchange being traded by every firm and changing hands in every act of exchange

winter is possibly not coming mitigating financial instability in an agent based model with interbank market abstract we develop a macroeconomic agent based model to study how financial instability can emerge from the co evolution of interbank and credit markets and the policy responses to mitigate its impact on the real economy the model is populated by heterogenous firms consumers and banks that locally interact in different markets in particular banks provide credit to firms according to a basel ii or iii macro prudential frameworks and manage their liquidity in the interbank market the central bank performs monetary policy according to different types of taylor rules we find that the model endogenously generates market freezes in the interbank market which interact with the financial accelerator possibly leading to firm bankruptcies banking crises and the emergence of deep downturns this requires the timely intervention of the central bank as a liquidity lender of last resort moreover we find that the joint adoption of a three mandate taylor rule tackling credit growth and the basel iii macro prudential framework is the best policy mix to stabilize financial and real economic dynamics however as the liquidity coverage ratio spurs financial instability by increasing the pro cyclicality of banks liquid reserves a new counter cyclical liquidity buffer should be added to basel iii to improve its performance further finally we find that the central bank can also dampen financial instability by employing a new unconventional monetary policy tool involving active management of the interest rate corridor in the interbank market

the financial accelerator in an evolving credit network we model a credit network characterized by credit relationships connecting i downstream d and upstream u firms and ii firms and banks the net worth of d firms is the driver of fluctuations the production of d firms and of their suppliers u firms in fact is constrained by the availability of internal finance proxied by net worth to the d firms the structure of credit interlinkages changes over time due to an endogeneous process of partner selection which leads to the polarization of the network at the aggregate level the distribution of growth rates exhibits negative skewness and excess kurtosis when a shock hits the macroeconomy or a significant group of agents in the credit network a bankruptcy avalanche can follow if agents leverage is critically high in a nutshell we want to explore the properties of a network based financial accelerator

the taylor rule and optimal monetary policy where it denotes the fed s operating target for the federal funds rate pt is the inflation rate measured by the gdp deflator yt is the log of real gdp and y t is the log of potential output identified empirically with a linear trend the rule has since been subject to considerable attention both as an account of actual policy in the united states and elsewhere and as a prescription for desirable policy taylor argues for the rule s normative significance both on the basis of simulations and on the ground that it describes u s policy in a period in which monetary policy is widely judged to have been unusually successful taylor 1999 suggesting that the rule is worth adopting as a principle of behavior here i wish to consider to what extent this prescription resembles the sort of policy that economic theory would recommend i consider the question in the context of a simple but widely used optimizing model of the monetary transmission mechanism which allows one to reach clear conclusions about economic welfare the model is highly stylized but incorporates important features of more realistic models and allows me to make several points that are of more general validity out of concern for the robustness of the conclusions reached the analysis here addresses only broad qualitative features of the taylor rule and attempts to identify features of a desirable policy rule that are likely to hold under a variety of model specifications

migration and the environment policy reform in a polluted open economy previous literature on labour migration has paid little attention to the influence of environmental attributes this paper attempts to remedy this void by developing a simple two region general equilibrium model with amenities playing a key role in affecting migration flows specifically we argue that in the presence of an environmental externality interregional labour migration depends not only on wages but also on amenities people may leave a region offering higher wages if the resulting utility loss from worsened amenities exceeds the gain in wages policies should be adopted by regions or nations to regulate the environment to provide for the quality of living to attain this goal regional or international policy cooperation on tradable pollution permits can be superior to pollution permits supplied independently by each region or nation while non tradable between them

liaisons dangereuses increasing connectivity risk sharing and systemic risk the recent financial crisis poses the challenge to understand how systemic risk arises endogenously and what architecture can make the financial system more resilient to global crises this paper shows that a financial network can be most resilient for intermediate levels of risk diversification and not when this is maximal as generally thought so far this finding holds in the presence of the financial accelerator i e when negative variations in the financial robustness of an agent tend to persist in time because they have adverse effects on the agent s subsequent performance through the reaction of the agent s counterparties 2012 elsevier b v all rights reserved

a leverage ratio rule for capital adequacy abstract this paper studies the economic foundations for maximum leverage ratio capital adequacy rules the paper makes three contributions to the literature first we show how to determine the maximum leverage ratio such that the probability of insolvency is less than some predetermined quantity two we show that a leverage ratio rule controls for the same risks as does a value at risk var capital adequacy rule third we argue that leverage ratio rules are better than var rules because they are more intuitive and easier to compare across firms

interest rate control and nonconvergence to rational expectations this paper investigates the feasibility of a monetary policy aimed at pegging the nominal rate of interest it shows that under general conditions such a policy would produce the well known cumulative process despite the fact that there exists a well behaved rational expectations equilibrium with no tendency for inflation to accelerate or decelerate the cumulative process shows up as the failure of learning to converge to rational expectations specifically the paper shows first in a conventional is lm model with an expectations augmented phillips curve and then in a micro based finance constraint model that if people follow any learning rule based on experience that satisfies a weak condition then the sequence of temporary equilibria under a policy of interest pegging cannot converge the nonconvergent path that will be observed accords with the familiar cumulative process in that inflation accelerates if the market rate of interest has been pegged below the natural rate

the backward incidence of pollution control in a rigid wage economy abstract the backward incidence of pollution controls onto the polluting and nonpolluting industries is examined in a two sector rigid wage economy characterized by unemployment in both the short run and the long run as expected more restrictive pollution controls result in contraction in the polluting sector and expansion in the nonpolluting sector somewhat unexpectedly national income may rise with stronger pollution controls if the polluting industry is relatively capital intensive

deleveraging crises and deep recessions a behavioural approach macroeconomic dynamics are characterized by alternating patterns of periods of relative stability and large swings standard micro founded macro economic models account for these patterns through exogenous and persistent shocks in this paper we develop a fully decentralized and micro founded macro economic agent based model augmented with an opinion model which produces endogenous waves of pessimism and optimism that feed back into firms leverage and households precautionary saving behaviour a major emergent property of our model is precisely the complex successions of stable and unstable macro economic regimes the model is further able to account for a wide spectrum of macro and micro empirical regularities within this framework we analyse a series of macro economic phenomena of key relevance in the current macro economic debate especially the occurrence of deleveraging crises and fisherian debt deflation recessions our analysis suggests that the relative dynamics of prices and wages and the resulting income distribution along a deflation ary path are critical determinants of the severity of the recession and the chances of recovery

systemic risk macroprudential policy frameworks monitoring financial systems and the evolution of capital adequacy abstract this paper analyses various issues that need to be tackled when promoting financial stability reviewing the progress made in certain key areas and the remaining challenges it explores the measurement of systemic risk and of individual institutions contribution to it it discusses aspects of macroprudential frameworks including how the countercyclical capital buffer envisaged in basel iii takes into account the properties of the financial cycle and the strengths and weaknesses of macro stress tests it analyses some of the challenges of how best to monitor financial systems and the broader economy in order to detect signs of vulnerability that might lead to future bouts of financial instability and of how to set prudential policy accordingly and it discusses the evolution of capital adequacy standards and the new emphasis on liquidity standards in international regulation

a model of market power in customer markets we develop a model for studying dynamic competition in environments with frictions that lead to partial lock in of customers to products the dynamic aspects associated with customer retention and acquisition introduce pricing incentives that do not exist in more traditional static product markets the proposed model while highly stylized maintains certain symmetry properties that allow us to obtain equilibrium existence and uniqueness we then study the comparative statics of the model and derive a closed form relationship between average equilibrium markups and the herfindahl index we illustrate how the model can be used by analyzing mergers in such a dynamic environment

leveraged network based financial accelerator abstract in this paper we build on the network based financial accelerator model of delli gatti et al 2010 modelling the firms financial structure following the dynamic trade off theory instead of the packing order theory moreover we allow for multiperiodal debt structure and consider multiple bank firm links based on a myopic preferred partner choice in case of default we also consider the loss given default rate lgdr we find many results i if leverage increases the economy is riskier ii a higher leverage pro cyclicality has a destabilizing effect iii a pro cyclical leverage weakens the monetary policy effect iv a central bank that wants to increase the interest rate should previously check if the banking system is well capitalized v an increase of the reserve coefficient has an impact similar to that produced by raising the policy rate but for the enlargement of bank reserves that improves the resilience of the banking system to shocks

to bail out or to bail in answers from an agent based model since the beginning of the 2008 financial crisis almost half a trillion euros have been spent to financially assist eu member states in taxpayer funded bail outs these crisis resolutions are often accompanied by austerity programs causing political and social friction on both domestic and international levels the question of how to resolve failing financial institutions and how this depends on economic preconditions is therefore a pressing and controversial issue of vast political importance in this work we employ an agent based model to study the economic and financial ramifications of three highly relevant crisis resolution mechanisms to establish the validity of the model we show that it reproduces a series of key stylized facts of the financial and real economy the distressed institution can either be closed via a purchase assumption transaction it can be bailed out using taxpayer money or it may be bailed in in a debt to equity conversion we find that for an economy characterized by low unemployment and high productivity the optimal crisis resolution with respect to financial stability and economic productivity is to close the distressed institution for economies in recession with high unemployment the bail in tool provides the most efficient crisis resolution mechanism under no circumstances do taxpayer funded bail out schemes outperform bail ins with private sector involvement

schumpeter meeting keynes a policy friendly model of endogenous growth and business cycles this paper studies an agent based model that bridges keynesian theories of demandgeneration and schumpeterian theories of technology fueled economic growth we employ the model to investigate the properties of macroeconomic dynamics and the impact of public polices on supply demand and the fundamentals of the economy we find profound complementarities between factors influencing aggregate demand and drivers of technological change that affect both short run fluctuations and longterm growth patterns from a normative point of view simulations show a corresponding complementarity between keynesian and schumpeterian policies in sustaining long run growth paths characterized by milder fluctuations and relatively lower unemployment levels the matching or mismatching between innovative exploration of new technologies and the conditions of demand generation appear to suggest the presence of two distinct regimes of growth or absence thereof characterized by different short run fluctuations and unemployment levels

stabilizing an unstable complex economy on the limitations of simple rules abstract this paper offers a systematic comparison of a wide range of leaning against the wind interest rate policy rules within a macroeconomic stock flow consistent agent based model the model generates endogenous booms and busts along credit cycles as feedback loops on aggregate demand affect the goods and the labor markets the real and the financial sides of the economy are closely interconnected the baseline scenario is able to qualitatively reproduce a wide range of stylized facts we show that a monetary policy rule that targets the movements in the net worth of firms significantly dampens the credit cycles and reduces the employment costs of financial crises because this indicator incorporates early signals of financial imbalances performances of this three mandate taylor rule are also more robust to the specific parameter values and regulatory framework than the standard dual mandate taylor rules nonetheless none of the policy rules under study completely eliminates the high employment costs of financial crises

macroeconomic simulation comparison with a multivariate extension of the markov information criterion abstract the paper aims to address the issue of comparing agent based models abms with more traditional var and dsge models by developing a multivariate extension of the markov information criterion mic of barde 2017 the univariate mic measures the informational distance between a simulation model and some empirical data by mapping the simulated data to a markov transition matrix and is proven to provide an unbiased measurement for all models reducible to a markov process as a result the mic can accurately measure distance using only simulated data for a wide class of data generating processes the paper first presents the multivariate extension of the mic and its validation on var and dgse models before carrying the first direct comparison between a macroeconomic abm and a dgse model namely the benchmark abm of caiani et al 2016 and smets and wouters 2007

capital regulation and monetary policy with fragile banks optimizing banks subject to runs are introduced in a macro model to study the transmission of monetary policy and its interplay with bank capital regulation when banks are risky a monetary expansion and a positive productivity shock increase bank leverage and risk risk based capital requirements amplify the cycle and are welfare detrimental within a class of simple policy rules the best combination includes mildly anticyclical capital ratios as in basel iii and a response of monetary policy to asset prices or bank leverage