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Real and financial crises: A multi-agent approach

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  • Mark Setterfield

    ()
    (Department of Economics, Trinity College)

  • Bill Gibson

    ()
    (Department of Economics,)

Abstract

Previous analyses of macroeconomic imbalances have employed models that either focus exclusively on real-side effects or financial-side disturbances. Real-side models usually make the unrealistic assumption that firms that save more than they invest effortlessly and costlessly transfer those surpluses to deficit firms, firms that require additional savings to sustain their plans for capital accumulation. On the other hand, there exists a well-developed, rigorous and elegant literature that uses the multi-agent systems (MAS) approach to analyze the recent financial crisis. These stand-alone models of the financial sector focus on the network structure of financial interplay but typically ignore real side interactions. In this paper, we develop a MAS model that integrates real and financial elements. The focus remains on the network structure and it is seen that randomly connected networks are more crash prone than are preferentially attached networks of financial agents. when real-financial interactions are taken into account. The results cast doubt on the connection between systemic risk and financial entities that are “too big or too linked to fail.”

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File URL: http://internet2.trincoll.edu/repec/WorkingPapers2013/WP13-09.pdf
File Function: First version, 2013
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Bibliographic Info

Paper provided by Trinity College, Department of Economics in its series Working Papers with number 1309.

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Length: 31 pages
Date of creation: Jul 2013
Date of revision: Jul 2014
Handle: RePEc:tri:wpaper:1309

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Related research

Keywords: Systemic risk; Crash; Herding; Bayesian learning; Endogenous money; preferential attachment; Agent-based models.;

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  1. Raghuram G. Rajan & Rodney Ramcharan, 2009. "Land and Credit: A Study of the Political Economy of Banking in the United States in the Early 20th Century," NBER Working Papers 15083, National Bureau of Economic Research, Inc.
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  9. Victoria Chick, 1983. "Macroeconomics after Keynes: A Reconsideration of the General Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262530457, December.
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  11. Sushil Bikhchandani & David Hirshleifer & Ivo Welch, 1998. "Learning from the Behavior of Others: Conformity, Fads, and Informational Cascades," Journal of Economic Perspectives, American Economic Association, vol. 12(3), pages 151-170, Summer.
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  13. Robert Axtell, 1999. "The Emergence of Firms in a Population of Agents," Working Papers 99-03-019, Santa Fe Institute.
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