A central bank building on a cliff edge, symbolizing economic instability.

Dark Corners of the Economy: Can Central Banks Navigate Instability?

Mira Elwood in Business & Economy December 2025 • 4 min read.

"Explore how agent-based models reveal hidden economic risks and the delicate balance central banks must maintain to avoid triggering financial crises."

For decades, economists relied on relatively straightforward models that assumed the economy would naturally correct itself. However, the 2008 financial crisis exposed critical flaws in this thinking. The crisis revealed that the economy is far more complex and prone to sudden, unpredictable collapses than previously understood. This realization has led to a search for new ways to understand and manage economic stability.

One promising approach involves agent-based models (ABMs). Unlike traditional models, ABMs simulate the economy as a collection of individual agents—firms, households, and banks—each with their own behaviors and interactions. This bottom-up approach allows economists to explore how the collective behavior of these agents can lead to emergent phenomena like economic booms, busts, and 'dark corners'—situations where the economy can suddenly and unexpectedly malfunction.

Recent research uses ABMs to investigate the role and effectiveness of central bank policies. Central banks, like the Federal Reserve in the United States, use tools such as interest rates to steer the economy toward desired levels of inflation and employment. But how effective are these policies in a complex, interconnected economy? And can these policies inadvertently trigger instability?

Unmasking Economic Instability: Agent-Based Models and Monetary Policy

A central bank building on a cliff edge, symbolizing economic instability.

A recent study extends a basic macroeconomic ABM to explore the impact of monetary policy. The model includes firms and households and introduces a central bank that sets interest rates to influence inflation and employment. The key finding is that while central banks can be successful in achieving their goals, overly aggressive policies can destabilize the economy.

The model reveals that the economy can exist in different equilibrium states, separated by critical boundaries. These boundaries represent 'dark corners' where small changes in policy can lead to large and unexpected consequences. If a central bank's policy is too aggressive, it can inadvertently push the economy across one of these boundaries, leading to instability and wild oscillations in economic activity.

Navigating a Narrow Window: The central bank must operate within a precise range. Actions that are too cautious are ineffective, while those that are too forceful create instability and unpredictable economic fluctuations.
Contrast with Traditional Models: This conclusion is markedly different from the predictions of standard Dynamic Stochastic General Equilibrium (DSGE) models, which often assume the economy is inherently stable and responds predictably to policy interventions.
Qualitative Insights: The model prioritizes understanding the general types of aggregate behavior, acknowledging that precise quantitative predictions may be less reliable.

The study emphasizes that the qualitative behavior of the artificial economy remains remarkably consistent, especially concerning instabilities and crises. The presence of these critical zones in the parameter space, where the economy is vulnerable to severe crises, highlights a fundamental challenge that policymakers must address.

Embracing Complexity: The Future of Economic Modeling

The research underscores the importance of embracing complexity in economic modeling. Agent-based models offer a valuable tool for exploring the potential consequences of policy decisions and identifying hidden risks that traditional models may miss. By understanding the 'dark corners' of the economy, central banks and other policymakers can make more informed decisions and navigate the delicate balance between stability and instability.

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Everything You Need To Know

What are 'dark corners' in the context of economic modeling, and why are they important?

In economic modeling, 'dark corners' refer to situations where the economy can suddenly and unexpectedly malfunction. These are critical boundaries where small changes in monetary policy can lead to large and unforeseen consequences, such as instability and wild oscillations in economic activity. They are important because they highlight hidden risks that traditional economic models may miss, underscoring the need for central banks to make more informed decisions to navigate the delicate balance between economic stability and instability.

How do agent-based models (ABMs) differ from traditional economic models in assessing economic stability?

Agent-based models (ABMs) differ significantly from traditional economic models by simulating the economy as a collection of individual agents—firms, households, and banks—each with their own behaviors and interactions. This bottom-up approach allows economists to explore how the collective behavior of these agents can lead to emergent phenomena like economic booms, busts, and 'dark corners.' Traditional models, like Dynamic Stochastic General Equilibrium (DSGE) models, often assume the economy is inherently stable and responds predictably to policy interventions, which the 2008 financial crisis proved to be flawed.

What role do central banks play in managing economic stability, and how can their policies inadvertently cause instability, according to agent-based models?

Central banks, such as the Federal Reserve, use tools like interest rates to steer the economy toward desired levels of inflation and employment. However, agent-based models reveal that overly aggressive monetary policies can destabilize the economy. If a central bank's policy is too aggressive, it can inadvertently push the economy across critical boundaries, leading to instability and wild oscillations in economic activity. This requires central banks to operate within a precise range, as actions that are too cautious are ineffective, while those that are too forceful create unpredictable economic fluctuations.

How does the agent-based model (ABM) study extend basic macroeconomic understanding, and what key findings does it reveal about monetary policy's impact?

The agent-based model extends basic macroeconomic understanding by incorporating firms, households, and a central bank that sets interest rates to influence inflation and employment. The key finding is that while central banks can achieve their goals, overly aggressive monetary policies can destabilize the economy, leading to 'dark corners.' These findings contrast with traditional Dynamic Stochastic General Equilibrium (DSGE) models, which often assume inherent economic stability, highlighting the importance of understanding the potential for instability in complex economic systems.

What does recent research using agent-based models suggest about the effectiveness of central bank policies in managing economic stability, and what are the implications for policymakers?

Recent research using agent-based models suggests that while central banks can be successful in achieving their goals, overly aggressive monetary policies can inadvertently trigger economic instability. The implication for policymakers is that they must navigate a narrow window of action, where actions that are too cautious are ineffective, and those that are too forceful create unpredictable economic fluctuations. Understanding the 'dark corners' of the economy is crucial for making more informed decisions and balancing stability and instability.