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The financial instability hypothesis: A stochastic microfoundation framework

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  • Chiarella, Carl
  • Di Guilmi, Corrado

Abstract

This paper examines the dynamics of financial distress and in particular the mechanism of transmission of shocks from the financial sector to the real economy. The analysis is performed by representing the linkages between microeconomic financial variables and the aggregate performance of the economy by means of a microfounded model with firms that have heterogeneous capital structures. The model is solved both numerically and analytically, by means of a stochastic approximation that is able to replicate quite well the numerical solution. These methodologies, by overcoming the restrictions imposed by the traditional microfounded approach, enable us to provide some insights into the stabilization policies which may be effective in a financially fragile system.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 35 (2011)
Issue (Month): 8 (August)
Pages: 1151-1171

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Handle: RePEc:eee:dyncon:v:35:y:2011:i:8:p:1151-1171

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Web page: http://www.elsevier.com/locate/jedc

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Keywords: Financial fragility Complex dynamics Stochastic aggregation;

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References

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Citations

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Cited by:
  1. Raberto, Marco & Teglio, Andrea & Cincotti, Silvano, 2012. "Debt, deleveraging and business cycles: An agent-based perspective," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 6(27), pages 1-49.
  2. Giovani Dosi & Giorgio Fagiolo & Andrea Roventini & Mauro Napoletano, 2012. "Income Distribution, Credit and Fiscal Policies in an Agent-Based Keynesian Model," INET Research Notes 11, Institute for New Economic Thinking (INET).
  3. Silvano Cincotti & Marco Raberto & Andrea Teglio, 2012. "Macroprudential Policies in an Agent-Based Artificial Economy," Revue de l'OFCE, Presses de Sciences-Po, vol. 0(5), pages 205-234.
  4. Mulligan, Robert F., 2013. "New evidence on the structure of production: Real and Austrian business cycle theory and the financial instability hypothesis," Journal of Economic Behavior & Organization, Elsevier, vol. 86(C), pages 67-77.
  5. Corrado Di Guilmi & Xue-Zhong He & Kai Li, 2013. "Herding, Trend Chasing and Market Volatility," Research Paper Series 337, Quantitative Finance Research Centre, University of Technology, Sydney.
  6. Domenico Delli Gatti & Corrado Di Guilmi & Mauro Gallegati & Simone Landini, 2012. "Reconstructing Aggregate Dynamics in Heterogeneous Agents Models. A Markovian Approach," Revue de l'OFCE, Presses de Sciences-Po, vol. 0(5), pages 117-146.
  7. Carl Chiarella & Corrado Di Guilmi, 2014. "Financial instability and debt deflation dynamics in a bottom-up approach," Economics Bulletin, AccessEcon, vol. 34(1), pages 125-132.
  8. Carl Chiarella & Corrado Di Guilmi, 2013. "Monetary Policy and Debt Deflation: Some Computational Experiments," Working Paper Series 10, Economics Discipline Group, UTS Business School, University of Technology, Sydney.
  9. Chiarella Carl & Di Guilmi Corrado, 2012. "The Fiscal Cost of Financial Instability," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 16(4), pages 1-29, October.
  10. Mulligan, Robert F., 2013. "A sectoral analysis of the financial instability hypothesis," The Quarterly Review of Economics and Finance, Elsevier, vol. 53(4), pages 450-459.
  11. Carl Chiarella & Corrado Di Guilmi, 2011. "Limit Distribution of Evolving Strategies in Financial Markets," Research Paper Series 294, Quantitative Finance Research Centre, University of Technology, Sydney.

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