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Financial Fragility and Macroeconomic Instability in a Heterogeneous Interacting Agents Framework

Russo, Alberto (2013): Financial Fragility and Macroeconomic Instability in a Heterogeneous Interacting Agents Framework.

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Abstract

A financial crisis can have important effects on the real economy. The more financially fragile are agents the more likely is the occurrence of a financial crisis. Moreover, financial contagion may have more or less severe consequences on the real economy, depending on the degree distribution of credit interlinkagess. However, financial instability may be due to real causes. For instance, the deregulation of markets may create the conditions for an increase of inequality. If rich people save a larger part of their income, while the poor are forced to reduce consumption, a lack of aggregate demand may follow, which can eventually lead to a large crisis.

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