Taming macroeconomic instability

Francesco Lamperti (1) , Antoine Mandel (2, 3) , Mauro Napoletano (4) , Alessandro Sapio (5) , Andrea Roventini (4) , Tomas Balint (1) , Igor Khorenzhenko (3, 6)

1 UP1 - Université Paris 1 Panthéon-Sorbonne
2 PSE - Paris School of Economics
3 CES - Centre d'économie de la Sorbonne
4 OFCE - Observatoire français des conjonctures économiques (Sciences Po)
5 PARTHENOPE - Università degli Studi di Napoli “Parthenope” = University of Naples
6 Universität Bielefeld = Bielefeld University

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 onoutput gap, inflationand credit growth, and a BaselIII prudential regulationis the bestpolicymix to improve the stability ofthe 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.

Keywords: Macro-prudential policy; Basel III regulation; Financial stability; Monetary policy; Agent based computational economics

Domains: Economics and Finance; Environmental studies

Francesco Lamperti, Antoine Mandel, Mauro Napoletano, Alessandro Sapio, Andrea Roventini, et al.. Taming macroeconomic instability: Monetary andmacro-prudential policy interactions in an agent-basedmodel. Journal of Economic Behavior and Organization, 2017, 19 (134), pp.117 - 140. ⟨10.1016/j.jebo.2016.12.017⟩. ⟨hal-03399574⟩