Transcript IWEMBA by SBS

Monetary Policy
Simulation Game
Yvan Lengwiler
WWZ, Economic Theory
University of Basel, Switzerland
Learning aim
MoPoS 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 game
nominal
interest rate
inflation
expectation
real interest
rate
IS
business
cycle
PC
inflation
How to play
You 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?
2 years
10 years
Taylor rule or
manual steering
happiness of
the public
accelerator
pedal
(interest
rate)
speed of
simulation
real growth
inflation
real interest
rate
nominal interest
rate
Liquidity trap
It 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 trap
In 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).
Contact
Should you have any comments, questions, or
suggestions concering MoPoS, please do not hesitate
to contact me at
[email protected]
Prof. Dr. Yvan Lengwiler
University of Basel
Dept of Economics (WWZ)
4003 Basel
Switzerland
www.wwz.unibas.ch/lengwiler