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.

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: financial instability, inequality, crisis
• Subjects: C - Mathematical and Quantitative Methods > C6 - Mathematical Methods ; Programming Models ; Mathematical and Simulation Modeling > C63 - Computational Techniques ; Simulation Modeling; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles; P - Economic Systems > P1 - Capitalist Systems > P17 - Performance and Prospects

References

Bernanke B.S., Gertler M.L., Gilchrist S. (1998), “The financial accelerator in a quantitative business cycle framework”, NBER Working Paper no. 6455.

De Cecco M. (1990), “Keynes revived: a review essay”, Journal of Monetary Economics, 26(1): 179-190.

Delli Gatti D., Gallegati M., Greenwald B., Russo A., Stiglitz J.E. (2010), “The financial accelerator in an evolving credit network”, Journal of Economic Dynamics and Control, 34(9): 1627-1650.

Duménil G., Lévy D. (2005), “Costs and benefits of Neoliberalism: A class analysis”, pp. 17-45, in: Epstein G. (ed.), Financialization and the World Economy, Cheltenham and Northampton, Edward Elgar.

Flannery M.J., Rangan K.P. (2006), “Partial adjustment toward target capital structures”, Journal of Financial Economics, 79(3): 469-506.

Greenwald B., Stiglitz J.E. (1993), “Financial market imperfections and business cycles”, Quarterly Journal of Economics, 108(1): 77-114.

Kalemli-Ozcan S., Sorensen B., Yesiltas S. (2011), “Leverage across firms, banks, and countries”, NBER Working Paper 17354.

Keynes J.M. (1936), The General Theory of Employment, Interest, and Money, London, Macmillan.

Lazonick W., O’Sullivan M. (2000), “Maximizing shareholder value: a new ideology for corporate governance”, Economy and Society, 29(1): 13-35.

Minsky H.P. (1982), “The financial instability hypothesis: capitalistic processes and the behavior of the economy”, pp. 13-39, in: Kindleberger C.P., Laffargue J.-P., (eds.), Financial Crises: Theory, History and Policy, Cambridge, Cambridge University Press.

Palley T.I. (2010), “The limits of Minsky’s financial instability hypothesis as an explanation of the crisis”, Monthly Review, 61(11).

Riccetti L., Russo A., Gallegati M. (2012), “An agent based decentralized matching macroeconomic model”, MPRA Paper 42211, University Library of Munich, Germany.

Riccetti L., Russo A., Gallegati M. (2013), “Leveraged network-based financial accelerator”, Journal of Economic Dynamics and Control, forthcoming.

Russo A. (2012), “Elements of novelty, known mechanisms, and the fundamental causes of the recent crisis”, MPRA Paper 41088, University Library of Munich, Germany.

Stockhammer E. (2004), “Financialisation and the slowdown of accumulation”, Cambridge Journal of Economics, 28(5): 719-741.

Van Treeck T. (2009), “The macroeconomics of 'financialisation' and the deeper origins of the world economic crisis”, IMK Working Paper no. 9, Macroeconomic Policy Institute.