Fiscal-Monetary Policy Scenarios and Securitisation Experiments in the Eurace Agent-Based Model

This thesis addressed two macro topics, i.e. fiscal and monetary policy making during recessions and the financial practise of securitisation, with the objective to contribute to the current debate and introduce novel aspects to the existing literature. The study of the impact of public policies pursued by the government and central bank on economic dynamics has incread its relevence, in particular in the aftermath of great financial crisis of 2007/9 and during the European soverign debt crisis. The securitisation process is considered a major triggering factor of the subprime mortgage crisis and still a possible source of financial instability. I delve into those topics using the large-scale agent-based and stock-flow consistent macroeconomic model and simulator EURACE, that has been enriched with the introduction of several fiscal and monetary policy choices and a securitisation process. The thesis discusses the advantages given by the Agent-Based Modeling (ABM) and the stock-flow consistent (SFC) approaches with respect to the mainstream dynamic stochastic general equilibrium (DSGE) models and show the main innovations of the enriched EURACE model compared to the existing agent-based models. I present in details the two main topics covered by the thesis and the results of computational experiments. Regarding the fiscal and monetary policiy scenarios, I set up an experiment with two base policy scenarios, i.e., stability and growth pact and fiscal compact, incrementally enriching them with complementary policies which relax fiscal rigidity and introduce quantitative easing. Results show that budgetary rigour performs well only if some mechanisms of fiscal relaxation and monetary accommodation are considered during bad times, thus confirming in a richer and more realistic model setting the fundamental tenet of Keynesian economics about the importance of sustaining aggregate demand during recessions. Concering the securitisation experiments, I enhanced EURACE by including a financial vehicle corporation (FVC), that buys loans and mortgages from banks and issues ABSs and MBSs, and a mutual fund, that invests both in ABSs and MBSs. By means of securitisation, banks conduct regulatory capital arbitrage in order to lend more. Results show that different levels of securitisation propensity are able to affect credit and business cycles in different manners. On one side, securitisation increases banks’ lending activity, influencing positively investment and consumption. On the other side, the increased amount of credit amplifies the negative shocks, due to higher loans write-offs probability, triggered by the boosted leding activity. The predominance of one effect on the other depends on the level of securitisation propensity and the time span considered.