Ph.D Thesis

Monetary Policy and Stabilization in a Multisectoral Micro-Macro Dynamic Simumlation Model

​Instability and fluctuation are properties of any capitalist economy, and the Global Financial Crisis brought back to the debate conditions and factors that amplify the regular business cycles. The crisis forced a macroeconomic rethinking, and the three pillars of consensus view were put in check: (i) the theory, (ii) the models, and (iii) the policy recommendations. The goal of this work is to contribute to a new economic thinking capable to make the right questions and to guide adequate economic policies, not only but especially in face of deep economic recessions and crises. To tackle the first pillar, we discuss the theoretical foundations of the New Consensus, which lead to the implication that monetary policy is fully capable to provide both nominal and real economic stability. The five traditional transmission channels of monetary policy collaborate to a negative correlation between the basic interest rate and aggregate demand, and between prices, as inflation is always explained by excess demand. The validity of each transmission channel is put into questioning by empirical evidence and theoretical reasons, but more importantly, using Post-Keynesian and Kaleckian theories of price formation under oligopolistic competition, alternative transmission mechanisms appear, and the effects of monetary policy might not necessarily be what conventional theory expects. The methodological pillar is tackled as we recognize that micro and sectoral aspects, as well as heterogeneity, should be considered in policy analysis, which is incompatible with the notion of the representative agent in orthodox DSGE models. The last decade saw a growing number of alternative models, especially in two heterodox simulation modeling approaches, and more recently a research agenda emerged to integrate the Agent-Based and the Stock-Flow Consistency approaches, as they are theoretically and methodologically complementary. We take advantage of a formal literature review on recent AB-SFC models to build up and enhance a precursor model, the Multisectoral Micro-Macro (MMM) model proposed by Possas and Dweck (2004) and Dweck (2006), which not only anticipated this methodological integration but also combined Keynesian, Kaleckian and Schumpeterian theories. Thus, we present a new version of the MMM model, as we understand that it is a broader goal of this thesis to develop this tool and make it more widespread, robust, complete, and ``user-friendly". Finally, we use this model to tackle the third pillar and investigate the role of monetary policy. Simulation experiments show that in an inflation target regime, the monetary authority cannot force inflation towards a target that is incompatible with the structural conditions of the economy, especially in an open economy. External inflation and the productive and competitive structures are determinants of the average inflation rate. Monetary policy can, however, mitigate inflation volatility mainly via the exchange rate channels, the traditional and the cost one, but it does so compromising real stabilization. As the relative effectiveness of monetary policy depends on its interaction with other policies, we test several policy combinations, and show that unconstrained fiscal policy performs better than monetary to provide real stability without worsening inflation. Not only alternative monetary policy rules should be implemented, but also new combinations, different from the NCM recommendation, should be used to improve real and nominal economic stability, mitigating the negative effects of shocks, and, more importantly, of crisis and recessions.

M.Sc. Dissertation

Instabilidade Financeira e a Autoridade Monetária: o Antes e o Depois da Crise de 2008 e a Abordagem Minskyana

Before the crisis of 2008, the monetary authority's action was based on the New Consensus on Macroeconomics: it was believed that monetary policy had only one objective (price stability) and one instrument (interest rate). Fiscal policy played a secondary role and it was believed that financial regulation was outside the scope of macroeconomic policy. After the great financial crisis, economists were forced to rethink macroeconomics. Influential economists, directors of international organizations and representatives of high-profile economic policy, began to debate the directions of macroeconomics, now considering the financial side and the role of the monetary authority in the face of financial instability. In parallel, non-mainstream authors have been discussing the role of financial instability under Minskyan’s view. In this view, a theory that assumes financial disturbances as normal and endogenous to the economic system is needed. Minsky was able to provide a theory that takes those aspects into account and, based on this theoretical framework, argues that the monetary authority should act in a different way from the conventional one. The goal of this paper is to analyze the role of the monetary authorities in the face of financial instability, particularly with regard to the conduct of monetary policy. We try to answer the following question, raised by the crisis of 2008: is the monetary authority by itself, through conventional monetary policy, able to provide financial stability? To answer this question, we present three views: the first view is the conventional view of the New Consensus before the crisis. The second view is the (re)view of the New Consensus after the crisis. And the third view is the unconventional Minskyan’s view.