David wrote:In the current version, the loan rate is determined by the central bank. Since there is only one commercial bank, the commercial bank's interest rate is always the same as the loan rate set by the central bank.
For the new banking system, there will be multiple commercial banks.
Each bank can set its own loan interest rate, as described in this post:
http://www.capitalismlab.com/forum/view ... 497#p11663
In the new banking system, the central bank will set an official benchmark interest rate and individual banks can set their own interest rates based on it.
There are a couple issues to be discussed:
1) Do you think that we should call it "Federal fund rate", which is the term coined by the US Federal Reserve or use a more generic name like "official bank rate" ? (
http://en.wikipedia.org/wiki/Bank_rate - different countries use different names for this.) Or any other name that you may suggest?
1) Do you think there should be a range limit for setting the loan interest rate at the individual commercial bank level? Like -2% to +2% of the central bank's official bank rate. Or there shouldn't be any limit and let the market dynamics work out on its own?
1) Actually it's not a set rate, but more like a "target rate" in practice. In most countries the board members of central bank are bankers themselves, mixed with appointed officials (politicians). They convey meetings to set a target rate within a range where most major banks within their control would accept. And base on "political agenda" it can be higher or lower. A lot of time the "target" doesn't work at all, if local banks don't have extensive business with the central bank. In EU, due to this nature, only a statistic rate is important than any single agency can set a "target". Like the BOEBR doesn't have much impact at all and is not analog to Federal fund rate (Bank of England is just a relative small part of a much larger financial structure). In a lot of the countries, the discount rate is more often used, due to it's a set rate, where policy can influence directly. Most central banks not only use these target/discount rates, but a lot of different kinds of open market operations (OMO), but since we don't have a financial market to begin with, I guess there are limited options (well, another OMO within the new banking mechanism is changing reserve level/ratio, thus affect money supply, but very uncommon in real world).
2) In real world, target rate is just a target, whether or not banks follows it depends on open market. But in the game, I wonder whether there will be enough banks and corporations entities to form a somewhat stable financial structure. In real world it's hundreds not thousands of different banks and millions of corporations within a country, compare to just dozens combined in the game. It would be interesting to see how a more agent based banking system would form with such few agents. I know mathematically most models can reach equilibrium (some might be unwanted equilibrium) eventually, but not quite sure how feasible to implement them in game mechanics (how often will they fall off the wages, so to speak). The restrain is meant for preventing simulation going out of control too often, right? Seems artificial, but is probably unavoidable. In Capitalism game term, we probably need a mature B2B interbank mechanism in place, if a completely free open market determined interest rate could form by itself.
BTW I think we need to consider loan to SME (local businesses) separate issue besides corporation loans and household loans. How huge the local businesses loans consists? How it resembles loans to households? What's the difference? What kind of model does it use, certainly not going to be the same as more agent-based AI corporate loans, but have to be similar enough.