Banks, Market Organization, and Macroeconomic Performance: An Agent-Based Computational Analysis

63 Pages Posted: 23 May 2011 Last revised: 4 Sep 2016

See all articles by Quamrul H. Ashraf

Quamrul H. Ashraf

Williams College - Department of Economics

Boris Gershman

American University - Department of Economics

Peter Howitt

Brown University - Department of Economics; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: September 1, 2016

Abstract

This paper is an exploratory analysis of the role that banks play in supporting what Jevons called the "mechanism of exchange.'' It considers a model economy in which exchange activities are facilitated and coordinated by a self-organizing network of entrepreneurial trading firms. Collectively, these firms play the part of the Walrasian auctioneer, matching buyers with sellers and helping the economy to reach prices at which peoples' trading plans are mutually compatible. Banks affect macroeconomic performance in this economy because their lending activities facilitate the entry and influence the exit decisions of trading firms. Both entry and exit have ambiguous effects on performance, and we resort to computational analysis to understand how they are resolved. Our analysis draws an important distinction between normal and worst-case scenarios, with the economy experiencing systemic breakdowns in the latter. We show that banks can provide a "financial stabilizer'' that more than counteracts the familiar financial accelerator, and that the stabilizing role of the banking system is particularly apparent in worst-case scenarios. In line with this result, we also find that under less restrictive lending standards banks are able to more effectively improve macroeconomic performance in the worst-case scenarios.

Keywords: Agent-based computational model, Market organization, Banking system, Macroeconomic stability, Financial stabilizer

JEL Classification: C63, E00, E63, G20, G28

Suggested Citation

Ashraf, Quamrul H. and Gershman, Boris and Howitt, Peter, Banks, Market Organization, and Macroeconomic Performance: An Agent-Based Computational Analysis (September 1, 2016). Available at SSRN: https://ssrn.com/abstract=1849269 or http://dx.doi.org/10.2139/ssrn.1849269

Quamrul H. Ashraf

Williams College - Department of Economics ( email )

24 Hopkins Hall Drive
Williamstown, MA 01267
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(413) 597-4045 (Fax)

HOME PAGE: http://econ.williams.edu/profile/qha1/

Boris Gershman (Contact Author)

American University - Department of Economics ( email )

4400 Massachusetts Avenue NW
Washington, DC 20016-8029
United States

HOME PAGE: http://nw08.american.edu/~gershman/

Peter Howitt

Brown University - Department of Economics ( email )

Box B
Providence, RI 02912
United States
401-863-2145 (Phone)
401-863-1970 (Fax)

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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