MODELING THE MONETARY TRANSMISSION MECANISM

In this paper we start to explore the adaptive view of monetary policy in a complex world by recurring to evolutionary algorithms and agent-based techniques. The role of controlling the economic system is assigned to a central bank which can experiment alternative policy strategies using the official short-term interest rate as an instrument. Capital market imperfections imply that credit variables are at the root of the monetary transmission mechanism, and that money turns out to be non-neutral even in the long-run. As we will see, this has profound implications for the conduct of monetary policy. Due to adaptation and interactions the economy is a complex system, and the concept of rational expectations equilibrium does not apply. Instead, the central banker can choose between commitment, here represented by the adoption of a fixed rule, or he can decide to adapt his strategy as he learns, his behaviour being modelled in what follows as a genetic algorithm.