monetary policy simulation game yvan lengwiler wwz, economic theory university of basel, switzerland
TRANSCRIPT
Monetary Policy Simulation Game
Yvan Lengwiler
WWZ, Economic TheoryUniversity of Basel, Switzerland
Learning aimMoPoS is a computer game that allows the user to play the role of a central bank governor.
You will confront many of the practical difficulties of monetary policy making.
The equations of the simulation model are subject to a flow of shocks. For that reason, you will constantly experience surprises.
Your startegy will influence the expectations of the public in this virtual economy, and these expectations affect your trade-offs.
Too cautious a policy will not be successful, but behaving in a too activist fashion will also spell trouble.
Structure of the simulation gamenominal interest
rate
real interest
rate
inflation expectati
on
business cycle
inflation
IS
PC
How to playYou will see a "Reuters screen" that contains the essential information about the state of the macroeconomy.
You can load prepared scenarios and play from there, or generate new random scenarios from scratch.
You manipulate the interest rate and you can observe the effects of these manipulations.
Your taks is to steer the economy in order to achieve stability. Can you end a recession? Can you end an inflation? And what do you do in a stagflation?
10 years
2 years
happiness of the public
accelerator pedal (interest
rate)
speed of simulation
Taylor rule or manual steering
inflation
real interestrate
real growth
nominal interest rate
Liquidity trapIt can happen that the virtual economy falls into a deflationary spiral.
Since the inflation rate is strongly negative, the real interest rate will be large even if the nominal interest rate is zero.
The nominal interest rate cannot fall below this bound because otherwise, cash would dominate deposits.
But the large real interest rate will further contribute to a contraction. The economy is trapped.
LIQUIDITY TRAP
Monetary policy is powerless.
Liquidity trap
Liquidity trapIn reality, a true liquidity trap is a very rare phenomenon.It requires the nominal return rates on all assets to vanish.This has probably never happened in history (not even in Japan right now).In the simulation, however, there is only one interest rate, and when this goes to zero and deflation is strong enough — bang! — you cannot escape the trap anymore.So, it is much more likely to experience this trap in the simulation than in real life.
Exercises
Next you will play the game.
You can do that on your own or in a group, as you wish.
Make a protocol of your observations (but keep it short).
We will discuss your experiences when we reconvene.
Possible exercises Load the scenario "stability.sim" (Simulator >
Load Simulation…) First play the game with the autopilot turned on… Observe what the autopilot does. Does it make
mistekes?
Load "stability.sim" again. Turn off the autopilot (You are in charge of
monetary policy now). Try to make smiley happy for as long as possible.
Load "stability.sim" yet again. Now your task is to keep the economy on a stable
path and avoid recession and inflation.
Possible exercises You can also experiment with other
scenarios. For instance, there are "recession.sim" and
"boom.sim"
Or you can generate new, random scenarios (with Simulator > Generate Random Scenario).
In order to share it, or for discussion in class, you can…
save a simulation (with Simulator > Save Simulation)
or print it (with File > Print).
ContactShould you have any comments, questions, or suggestions concering MoPoS, please do not hesitate to contact me at
Prof. Dr. Yvan LengwilerUniversity of BaselDept of Economics (WWZ)4003 BaselSwitzerland
www.wwz.unibas.ch/lengwiler