Bubbles, Crashes and the Financial Cycle: Insights from a Stock-Flow Consistent Agent-Based Macroeconomic Model

52 Pages Posted: 10 Jun 2015 Last revised: 23 Jun 2015

See all articles by Sander van der Hoog

Sander van der Hoog

Bielefeld University

Herbert Dawid

Bielefeld University - Department of Business Administration and Economics; Center for Mathematical Economics

Date Written: May 18, 2015

Abstract

This paper explores how different credit market and banking regulations affect business fluctuations. Capital adequacy and reserve requirements are analysed for their effect on the risk of severe downturns. We develop an agent-based macroeconomic model in which financial contagion is transmitted through balance sheets in an endogenous firm-bank network, that incorporates firm bankruptcy and heterogeneity among banks to capture the fact that contagion effects are bank-specific. Using concepts from the empirical literature to identify amplitude and duration of recessions and expansions we show that more stringent liquidity regulations are best to dampen output fluctuations and prevent severe downturns. Under such regulations both leverage along expansions and amplitude of recessions become smaller. More stringent capital requirements induce larger output fluctuations and lead to deeper, more fragile recessions. This indicates that the capital adequacy requirement is pro-cyclical and therefore not advisable as a measure to prevent financial contagion.

Keywords: Financial crises, Credit market and banking regulations, Financial fragility, Agent-based Macroeconomics

JEL Classification: C63, E03, G01, G28

Suggested Citation

van der Hoog, Sander and Dawid, Herbert, Bubbles, Crashes and the Financial Cycle: Insights from a Stock-Flow Consistent Agent-Based Macroeconomic Model (May 18, 2015). Bielefeld Working Papers in Economics and Management No. 01.2015. Available at SSRN: https://ssrn.com/abstract=2616662 or http://dx.doi.org/10.2139/ssrn.2616662

Sander Van der Hoog (Contact Author)

Bielefeld University ( email )

Universitätsstraße 25
Bielefeld, 33615
Germany

Herbert Dawid

Bielefeld University - Department of Business Administration and Economics ( email )

P.O. Box 100131
D-33501 Bielefeld, NRW 33501
Germany
+49-521-1064843 (Phone)
+49-521-1062994 (Fax)

Center for Mathematical Economics ( email )

Postfach 10 01 31
Bielefeld, D-33501
Germany

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