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

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 literature

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

The Model Starting point: Creation of money Households: C = q · D Banks: R = r · D → MB = C + R and controlled by CB r M 1 = 1 + q L = 1 − r q + r · M B q + r · M B D = . . .

The Model

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

Better Microfoundation ? Makro Aggregate Micro Agents Markets Micro Foundation

Better Microfoundation ? Makro Makro Aggregate Aggregate Micro Micro Markets Agents Markets Agents Micro Foundation

Better Microfoundation ? Makro Makro Aggregate Aggregate Micro Micro Markets Agents Markets Agents Microscopic Foundation Micro Foundation

Extension 1: Bank Runs and Systemic Risk New assumption ¯ h Buyer h Seller Assets Liabilities Assets Liabilities Cash Loan Bank Cash Loan Bank ¯ ¯ h h C h L h C L Deposits Deposits ¯ h D h D Equity Equity ¯ E h h E Price: ∆ ∼ U ( 0 , C h )

Extension 1: Bank Runs and Systemic Risk New assumption ¯ h Buyer h Seller Assets Liabilities Assets Liabilities Cash Loan Bank Cash Loan Bank h + ∆ ¯ ¯ h C h − ∆ L h C L Deposits Deposits ¯ h D h D Equity Equity ¯ E h h E Price: ∆ ∼ U ( 0 , C h )

Extension 1: Bank Runs and Systematic Risk

Extension 1: Bank Runs and Systematic Risk

Extension 1: Bank Runs and Systematic Risk

Extension 1: Bank Runs and Systemic Risk 600 100 500 80 monetary units monetary units 400 60 M B 300 Cash M1 40 Reserves Deposits 200 Cash 20 100 0 0 0 1 2 3 4 5 0 1 2 3 4 5 time time 4 x 10 4 x 10

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

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

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 0.04 0 0 0 0 0 200-400 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

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

Extension 2: Bailout Policy 1600 M1 1400 Deposits Cash 1200 monetary units 1000 800 600 400 200 0 0 2 4 6 time 4 x 10 Policy A: Liquidation of all assets and liabilities

Extension 2: Bailout Policy 1600 1600 M1 M1 1400 1400 Deposits Deposits Cash Cash 1200 1200 monetary units 1000 monetary units 1000 800 800 600 600 400 400 200 200 0 0 0 2 4 6 0 2 4 6 time time 4 4 x 10 x 10 Policy A: Liquidation of all Policy B: Liquidation until assets and liabilities liabilities = 0

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 0 - - - Policy B 0.03 0.11 0.12 0.13 0 - -