Causes of Financial Instability: Don’t Forget Finance
Dirk J. Bezemer
University of Groningen
April 12, 2011
Levy Economics Institute of Bard College Working Paper No. 665
Given the economy’s complex behavior and sudden transitions as evidenced in the 2007-08 crisis, agent-based models are widely considered a promising alternative to current macroeconomic practice dominated by DSGE models. Their failure is commonly interpreted as a failure to incorporate heterogeneous interacting agents. This paper explains that complex behavior and sudden transitions also arise from the economy’s financial structure as reflected in its balance sheets, not just from heterogeneous interacting agents. It introduces “flow-of-funds” and “accounting” models, which were preeminent in successful anticipations of the recent crisis. In illustration, a simple balance-sheet model of the economy is developed to demonstrate that nonlinear behavior and sudden transition may arise from the economy’s balance-sheet structure, even without any microfoundations. The paper concludes by discussing one recent example of combining flow-of-funds and agent-based models. This appears a promising avenue for future research.
Number of Pages in PDF File: 28
Keywords: Credit Crisis, Finance, Complex Systems, DSGE, Agent-based Models, Stock- flow Consistent Models
JEL Classification: B52, C63, E32, E37, E44working papers series
Date posted: April 13, 2011
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo2 in 1.172 seconds