Taming macroeconomic instability

Journal article: 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.

Author(s)

Francesco Lamperti, Antoine Mandel, Mauro Napoletano, Alessandro Sapio, Andrea Roventini, Tomas Balint, Igor Khorenzhenko

Journal
  • Journal of Economic Behavior and Organization
Date of publication
  • 2017
Keywords JEL
C63 E52 E6 G1 G21 G28
Keywords
  • Macro-prudential policy
  • Basel III regulation
  • Financial stability
  • Monetary policy
  • Agent based computational economics
Internal reference
  • 2441/9labe9r4se65i78968603e92m
Pages
  • 117 – 140
Version
  • 1
Volume
  • 19