Title: Animal spirits in a NKM with financial intermediation and a stock market
Authors: Naira Kotb - Otto-Friedrich-Universität Bamberg (Germany) [presenting]
Christian Proano - University of Bamberg (Germany)
Abstract: A macro-finance interaction model is presented which integrates together a NKM with bounded rationality, an agent-based stock market and a banking sector. In the model, financial intermediation leads to the existence of two, rather than one, interest rate: (1) the policy rate, which is also the rate paid by banks to households on deposits, and (2) the rate paid by firms to banks on loans. The later constitutes of the first plus a spread. The spread is a key variable in the model. Households' savings are diversified among bank deposits and stock purchases. It is found that, banking intensifies animal spirits and amplifies shocks. The intensity of amplification is much higher when the spread is closely tied to the output gap than when it is tied to the stock prices. It is also found that the effect of households' purchase of stocks on the stability of the real sector (and the stock market) depends on the choice of parameters that relate the spread to the output gap and the stock prices.