Abstract for: Linking Economic Modeling and System Dynamics: A Basic Model for Monetary Policy and Macroprudential Regulation
The financial crisis shifted the focus of monetary policy. Whereas before the crisis the main goal of using monetary policy instruments was to keep the inflation rate low after the crisis policy makers put much emphasis on stabilizing the financial system. The economic literature has started to elaborate on the issue of macroprudential regulation only recently. Financial turbulences, by their very nature, constitute a complex dynamic phenomenon. Hence, an analysis employing tools of system dynamics should help to improve our understanding of the underlying feed-backs. In order to link economic reasoning and the systems approach a model of financial behavior developed by Stein is introduced and used to create building blocks for a basic dynamic simulation model.