The impact of monetary policy on financial stability: using an agent-based model to explain rebound effects

Since the financial crisis 2007, financial stability has come into the focus of central banks and the associated monetary policy. The impact of monetary policy on financial stability is dependent on financial market and inflation expectations which influence the behavior of a variety of agents in financial markets and in the real economy through the so called monetary transmission channel. These expectations of agents are mutually dependent and trigger rebound or spillover effects for every single monetary policy decision. Hence, understanding the dynamics of rebound effects is crucial to stabilize the economy. To get a better understanding of how monetary policy determines financial stability, we develop a sophisticated agent-based model that mimics the entire monetary transmission mechanism.