Agent-based simulations of monetary policy and financial markets
This thesis contributes to the fields of monetary policy and financial market research by applying one of the most popular of these methodologies, agent-based modelling (ABM) to four distinct research questions. These research questions are as follows. (1) How do central bank interest rate changes affect inflation in the short term? (2) Is it plausible that stock prices have become decoupled from their fundamental value? (3) How does stock market volatility affect wealth inequality? (4) How can central bank balance sheet policy best be used to stabilize asset prices? ABM simulations yield the following results: (1) In our ABM, interest rate changes have a small effect on inflation because interest rate pass-through to costs, consumption, investment and bank lending is rather weak; (2) When simple mean-reversion trading strategies start eclipsing fundamentalist strategies, stock prices can start to deviate from their fundamentals, this would be hard to detect using the standard stock price statistics; (3) Stock trading tends to lead to a highly unequal state as the wealth of more and more traders becomes so low that they have to stop trading. Increasing price volatility accelerates the movement towards this state; (4) The central bank can stabilize asset prices without disturbing the average price if it commits to buying stocks that are too far below fundamental value and selling stocks that are too far above it.