Macroprudential Policy in a Heterogeneous Environment-An Application of Agent-Based Approach in Systemic Risk...

Area of Science:

• Economics
• Computational Economics
• Financial Stability

Background:

• Macroprudential policy assessment is crucial, often using Dynamic Stochastic General Equilibrium (DSGE) models.
• The DSGE-3D model, developed by the European Systemic Risk Board and European Central Bank, is a key tool for analyzing financial cycles and macroprudential policies.
• Existing DSGE models, including DSGE-3D, rely on the representative agent assumption, limiting analysis of economic diversity.

Purpose of the Study:

• To present an Agent-Based Modeling (ABM) framework as an alternative to DSGE models.
• To develop an ABM environment for simulating the impact of macroprudential policies on the economy, financial system, and society.
• To address the limitations of the representative agent assumption by incorporating agent heterogeneity.

Main Methods:

• Development of an Agent-Based Model (ABM) that explicitly models heterogeneous agents.
• Utilizing the ABM framework to conduct counterfactual simulations.
• Comparing the ABM approach with traditional DSGE modeling.

Main Results:

• The ABM framework allows for a more nuanced analysis of economic diversity compared to DSGE models.
• Simulations demonstrate the stabilizing effects of macroprudential policies.
• The model highlights the importance of agent heterogeneity in understanding policy impacts.

Conclusions:

• Agent-Based Modeling offers a powerful alternative for assessing macroprudential policies, particularly by capturing agent heterogeneity.
• The developed ABM provides a flexible environment for policy analysis and understanding financial stability.
• Macroprudential policies exhibit stabilizing effects, especially during periods of economic or financial distress, when agent diversity is considered.