Money Creation and Financial Instability An Agent-Based approach - - PowerPoint PPT Presentation

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Money Creation and Financial Instability An Agent-Based approach - - PowerPoint PPT Presentation

Apr 13, 2023 346 likes •578 views

Money Creation and Financial Instability An Agent-Based approach by Matthias Lengnick University of Kiel Agent-Based Computational (ACE) Economics 0.3% 0.2% 0.1% 0.0% 1990 1995 2000 2005 2010 Relevance of ACE in economic

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Money Creation and Financial Instability – An Agent-Based approach –

by Matthias Lengnick University of Kiel

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Agent-Based Computational (ACE) Economics

1990 1995 2000 2005 2010 0.0% 0.1% 0.2% 0.3%

Relevance of ACE in economic literature

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Current ACE Macro Models

◮ Complex

◮ many types of agents ◮ many interaction rules ◮ black box

◮ Not strictly microfounded

◮ aggregates are directly operating ◮ matching lists, queuing lists, rationing mechanism

◮ Not Stock-Flow-Consistent ◮ Very different from standard theory

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The Model

Starting point: Creation of money Households: C = q · D Banks: R = r · D → MB = C + R and r controlled by CB M1 = 1+q

q+r · MB

L = 1−r

q+r · MB

D = . . .

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The Model

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The Model

◮ Large overlap with standard theory

  • similar assumptions
  • similar results

◮ Equilibrium included but not guaranteed ◮ Intuitive / no black box ◮ Individual-based (i.e. Agent-based) ◮ No rationality requirements / zero intelligence agents ◮ Microfoundation

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Better Microfoundation ?

Makro Micro Aggregate Agents Markets

Micro Foundation

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Better Microfoundation ?

Makro Micro Aggregate Agents Markets

Micro Foundation

Makro Micro Aggregate Agents Markets

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Better Microfoundation ?

Makro Micro Aggregate Agents Markets

Micro Foundation

Makro Micro Aggregate Agents Markets

Microscopic Foundation

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Extension 1: Bank Runs and Systemic Risk

New assumption h Buyer

Assets Liabilities Cash Loan Bank C h Lh Deposits Dh Equity E h

¯ h Seller

Assets Liabilities Cash Loan Bank C

¯ h

L

¯ h

Deposits D

¯ h

Equity E

¯ h

Price: ∆ ∼ U(0, C h)

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Extension 1: Bank Runs and Systemic Risk

New assumption h Buyer

Assets Liabilities Cash Loan Bank C h − ∆ Lh Deposits Dh Equity E h

¯ h Seller

Assets Liabilities Cash Loan Bank C

¯ h + ∆

L

¯ h

Deposits D

¯ h

Equity E

¯ h

Price: ∆ ∼ U(0, C h)

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Extension 1: Bank Runs and Systematic Risk

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Extension 1: Bank Runs and Systematic Risk

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Extension 1: Bank Runs and Systematic Risk

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Extension 1: Bank Runs and Systemic Risk

1 2 3 4 5 x 10

4

20 40 60 80 100 time monetary units MB Cash Reserves 1 2 3 4 5 x 10

4

100 200 300 400 500 600 time monetary units M1 Deposits Cash

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Extension 1: Bank Runs and Systematic Risk

Table : Conditional Probabilities to Become Insolvent

Recent BA Breakdowns IB Market start 1 2 3 4 5 > 5 Off 0.04 0.14 0.23 0.22 0.09 0.00 0.00

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Extension 1: Bank Runs and Systematic Risk

Table : Conditional Probabilities to Become Insolvent

Recent BA Breakdowns IB Market start 1 2 3 4 5 > 5 Off 0.04 0.14 0.23 0.22 0.09 0.00 0.00 On 0.02 0.78 0.9 0.8 0.72 0.59 0.4

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Extension 1: Bank Runs and Systematic Risk

Table : Conditional Probabilities to Become Insolvent

Recent BA failures IB Credits start 1 2 3 4 5 > 5 0-200 0.04 200-400 0.02 0.22 0.21 0.11 0.09 0.05 0.12 400-600 0.17 0.62 0.73 0.51 0.52 0.42 0.35 600-800 0.56 0.93 0.93 0.84 0.77 0.72 0.61 > 800 0.88 0.99 0.99 0.94 0.84 0.77 0.75

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Conclusion

◮ Very simple & intuitive ACE model ◮ Rigorously agent-based / microscopically founded ◮ Overlap with standard theory

  • standard assumptions
  • standard results included as special case

◮ Rich dynamics:

  • Endogenous equilibrium (limiting case)
  • Bank Runs
  • Endogenous crises
  • Systemic Risk
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Extension 2: Bailout Policy

2 4 6 x 10

4

200 400 600 800 1000 1200 1400 1600 time monetary units M1 Deposits Cash

Policy A: Liquidation of all assets and liabilities

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Extension 2: Bailout Policy

2 4 6 x 10

4

200 400 600 800 1000 1200 1400 1600 time monetary units M1 Deposits Cash

Policy A: Liquidation of all assets and liabilities

2 4 6 x 10

4

200 400 600 800 1000 1200 1400 1600 time monetary units M1 Deposits Cash

Policy B: Liquidation until liabilities = 0

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Extension 2: Bailout Policy

Table : Conditional Probabilities to Become Insolvent

Recent BA Breakdowns Bailout Policy start 1 2 3 4 5 > 5 None 0.02 0.78 0.9 0.8 0.72 0.59 0.4 Policy A 0.06 0.12 0.08

  • Policy B

0.03 0.11 0.12 0.13