Minsky from the Bottom Up - Formalising the Two-Price Model of Investment in a Simple Agent-based Framework
ExSIDE Working Paper Series, No. 13-2019
42 Pages Posted: 26 Sep 2019 Last revised: 27 May 2020
Date Written: September 16, 2019
Using a simple agent-based stock-flow consistent (AB-SFC) framework, this paper presents a fully formalised version of the two-price model of capital investment which forms an important but relatively neglected component of Hyman Minsky's Financial Instability Hypothesis. The model presented in this paper consists of an agent-based sector of consumption goods firms incorporating behavioural rules formalising the two-price model as well as three strongly simplified aggregated sectors. The model is calibrated empirically using moments drawn from US data, demonstrating that it is capable of producing empirically plausible time-series. Simulations show that the uncoordinated investment strategies of individual firms lead to the emergence of investment-driven cycles at the aggregate level. Desired investment is centrally driven by firms' expectations, with complementarities in firms' investment strategies together with changes in financing conditions leading to the emergence of cyclical dynamics. It is also shown that the introduction of a stylised public sector can contribute to a stabilisation of the model.
Keywords: Stock-flow consistency, Agent-based models, Financial instability, Investment
JEL Classification: E12, E22, E32, C63
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