Matching Frictions, Credit Reallocation and Macroeconomic Activity: How Harmful are Financial Crises?

38 Pages Posted: 28 Feb 2018

See all articles by Emanuele Ciola

Emanuele Ciola

Marche Polytechnic University

Edoardo Gaffeo

University of Trento - Department of Economics and Management

Mauro Gallegati

Università Politecnica delle Marche - Faculty of Economics

Date Written: February 19, 2018

Abstract

This paper develops a macroeconomic model of real-financial market interactions in which the credit and the business cycles reinforce each other according to a bidirectional causal relationship. We do so in the context of a computational agent-based framework, where the channelling of funds from savers to investors occurring through intermediaries is affected by information frictions. Since banks compete in both the deposit and the loan markets, the whole dynamics is driven by endogenous fluctuations in the size of the intermediaries balance sheet. We use the model to show that financial crisis are particularly harmful when hitting in phase with a real recession, and that when this occurs the loss in real output is permanent.

Keywords: Agent-based model, matching frictions, banking, financial crises

JEL Classification: E32, E37, G01

Suggested Citation

Ciola, Emanuele and Gaffeo, Edoardo and Gallegati, Mauro, Matching Frictions, Credit Reallocation and Macroeconomic Activity: How Harmful are Financial Crises? (February 19, 2018). Available at SSRN: https://ssrn.com/abstract=3126289 or http://dx.doi.org/10.2139/ssrn.3126289

Emanuele Ciola

Marche Polytechnic University ( email )

Piazza Roma, 22
Ancona, 60121
Italy

Edoardo Gaffeo (Contact Author)

University of Trento - Department of Economics and Management ( email )

Via Inama 5
Trento, Trento 38100
Italy

Mauro Gallegati

Università Politecnica delle Marche - Faculty of Economics ( email )

Piazzale Martelli, 8
60121 Ancona
Italy
++390712207188 (Phone)
++390712207102 (Fax)

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