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Real and financial interacting oscillators: a behavioral macro-model with animal spirits

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  • Ahmad Naimzada
  • Marina Pireddu

Abstract

In this paper we propose a model in which the real side of the economy, described via a Keynesian good market approach, interacts with the stock market with heterogeneous speculators, i.e., optimist and pessimist fundamentalists. Employing analytical and numerical tools, we detect the mechanisms and the channels through which instabilities get transmitted between markets. In order to perform such analysis, we introduce the “interaction degree approach”, which allows us to study the complete three-dimensional system by decomposing it into two subsystems, i.e., the isolated financial and real markets, easier to analyze, that are then interconnected through a parameter describing the interaction degree between the two markets. Next, we derive the stability conditions both for the isolated markets and for the whole system with interacting markets. Finally, we show how to apply the “interaction degree approach” to its role becomes more ambiguous when the markets are interconnected. However, our numerical simulations suggest that increasing the bias has generally a destabilizing effect. our model. To this aim, we first classify the possible scenarios according to the stability/instability of the isolated financial and real markets. For each of those frameworks we consider different possible parameter configurations and we show, both analytically and numerically, which are the effects of increasing the degree of interaction between the two markets. In particular, we find that the instability of the real market seems to have stronger destabilizing effects than the instability of the financial market: in fact, the former gets transmit- ted and possibly amplified by the connection with the financial market, while the latter gets dampened and possibly eliminated by the connection with the real market. We conclude our analysis by showing which are the effects of an increasing bias. Although it is clearly destabilizing when markets are isolated,

Suggested Citation

  • Ahmad Naimzada & Marina Pireddu, 2014. "Real and financial interacting oscillators: a behavioral macro-model with animal spirits," Working Papers 268, University of Milano-Bicocca, Department of Economics, revised Feb 2014.
    • Handle: RePEc:mib:wpaper:268
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    References listed on IDEAS

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    Cited by:

    1. Alexey Vasilenko, 2017. "Should Monetary Authorities Prick Asset Price Bubbles? Evidence from a New Keynesian Model with an Agent-Based Financial Market," HSE Working papers WP BRP 182/EC/2017, National Research University Higher School of Economics.
    2. Weihong Huang & Yu Zhang, 2017. "Endogenous Fundamental and Stock Cycles," Computational Economics, Springer;Society for Computational Economics, vol. 50(4), pages 629-653, December.
    3. Alessia Cafferata & Marwil J. Dávila-Fernández & Serena Sordi, 2020. "(Ir)rational explorers in the financial jungle: modelling Minsky with heterogeneous agents," Department of Economics University of Siena 819, Department of Economics, University of Siena.

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    More about this item

    Keywords

    Nonlinearities; complex dynamics; oscillators; Keynesian models; animal spirits; behavioral finance.;
    All these keywords.

    JEL classification:

    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles

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