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This model reproduces the "Liquidity Trap", situation in monetary economics in which a country's nominal interest rate has been lowered nearly or equal to zero to avoid a recession, but the liquidity in the market, created by these low interest rate, does not stimulate the economy.?
Our aim is to examine how savers' investment decisions are influenced by a monetary policy of reduction of the interest rate in a situation of economic slowdown.
According to Keynes' theory, when the interest rate decrease people demand more money for two reasons: firstly, to take advantage of a possible increase of the interest rate in the future; secondly, to avoid losses due to the fact that when the interest rate increases, the value of the titles decreases.
There are two kinds of agents: banks and savers, both created as turtles to use links.?Savers can choose whether to invest their excess liquidity in risk-free bonds (BOT) or to hold it in liquid form.
?The individuals are distinguishable on the base of their color in relationship to their degree of wealth. To the darkest tonality it corresponds the group of individuals with the greatest level of wealth while to the clearest tonality it corresponds the group formed by the individuals with the lowest level of wealth.
?At the beginning each saver has got excess liquidity to be invested and this liquidity is equal to a value between 10% and 30% of their total wealth. When they will not have any more liquidity to purchase new titles, they will sell their titles.
?Each bank has its own clients and these ones are divided in five categories according to their critical rate and on the base of this rate they will effect their choices of investment.?When the system starts running, savers move randomly and interact with banks only if they come to their own bank.
Every five seconds 0.25% of the interest rate is cut by the Central Bank.? When the market interest rate is greater than the critical rate of the individual, this will choose to invest its excess liquidity in bonds, otherwise he will exclusively hold money.
BUTTONS:
There are three buttons that control the execution of the model:
- SETUP: it resets everything to the starting values and creates the world with the number of savers which can be chosen by the "savers_number" slider.
-GO ONCE: it runs the simulation step by step
-GO: it runs the simulation continuously until the button remains pressed.
SLIDERS:
There are nine sliders and their values have to be chosen before starting the simulation:
-SAVERS_NUMBER: the number of savers you would like to start the simulation with.
-RISKLESS_BOND: the total amount of bonds kept at the beginning by banks.
-INTEREST_RATE: the market interest rate at which you want to start the simulation.
-BONDS_TO_NEGOTIATE: the number of bonds that savers buy/sell during the simulation.
-REF_RATE1: threshold of critical interest rate that savers compare with the market interest rate to take investment decision, assigned to savers which have a level of wealth between 1000 and 3000.
-REF_RATE2: treshold of critical interest rate that savers compare with the market interest rate to take investment decision, assigned to savers which have a level of wealth between 3000 and 5000.
-REF_RATE3:treshold of critical rate that savers compare with the market interest rate to take investment decision, assigned to savers which have a level of wealth between 5000 and 8000.
-REF_RATE4: treshold of critical interest rate that savers compare with the market interest rate to take investment decision, assigned to savers which have a level of wealth between 8000 and 10000.
-REF_RATE5: treshold of critical interest rate that savers compare with the market interest rate to take investment decision, assigned to savers which have a level of wealth between 10000 and 15000.
SWITCH:
There are five switches on the screen:
CB_ACTION?: if it is switched on, it allows every 5 seconds a cut of the interest_rate equal to 0.25%
SHOW_LIQUIDITY?: it allows to show the liquidity value for each saver.
SHOW_A_LINKS?: it allows to show in graphical form the relationship between bankA and its clients.
SHOW_B_LINKS?: it allows to show in graphical form the relationship between bankB and its clients.
SHOW_C_LINKS?: it allows to show in graphical form a the relationship between bankC and its clients.
SHOW_D_LINKS?: it allows to show in graphical form the relationship between bankD and its clients.
PLOTS:
There are seven plots:
TOTAL BONDS SAVERS/BANKS: it compares the total number of the bonds held by the savers with the ones held by the banks.
TOTAL LIQUIDITY SAVERS/BANKS: it compares the total liquidity held by the savers with the ones held by the banks.
TOTAL BONDS REF_1: it shows, during the simulation, the trend of the total number of bonds held by savers with critical rate equal to ref_rate1.
TOTAL BONDS REF_2: it shows, during the simulation, the trend of the total number of bonds held by savers with critical rate equal to ref_rate2.
TOTAL BONDS REF_3: it shows,during the simulation, the trend of the total number of bonds held by savers with critical rate equal to ref_rate3.
TOTAL BONDS REF_4: it shows,during the simulation, the trend of the total number of bonds held by savers with critical rate equal to ref_rate4.
TOTAL BONDS REF_5: it shows,during the simulation, the trend of the total number of bonds held by savers with critical rate equal to ref_rate5.
Each plots is provided with monitors which brings back the numerical values assumed by the variables of interest.
If you want to observe the simulation of the liquidity trap, it is necessary that the switch CB_ACTION? is on. In this way it can be observed that every 5 second the value of the slider INTEREST_RATE decreases by 0.25%.
It is interesting to observe how the total number of the titles owned by savers changes according to the decrease of the market interest rate.
It is interesting to try different combinations of the sliders.
For example it could be changed the referance rates of the savers in relationship with the change of market interest rate (also modifiable with the slider) to see how they react to the interest rate's cut.
It is also possible to change the variables created through sliders: the number of savers, the number of bonds and the number of bonds to buy or sell in each negotiation.
In our model the market interest rate is exogenous and to improve the model itself is possible to define it through the IS-LM model.
Another extension could be the introduction of the inflation that we have not considered. .
O.Blanchard, "Macroeconomics", Prentice Hall, 2006;
Pittaluga G.B., "Economia Monetaria", Hoepli, Milano, 2007.