IDEAS home Printed from https://ideas.repec.org/p/uto/dipeco/201924.html
   My bibliography  Save this paper

Complexity, Conventions and Instability: the role of monetary policy

Author

Listed:

Abstract

Ever since the 2008 financial crisis, there has been both a widespread recognition that the mainstream approach on financial markets has failed to anticipate and to justify the crisis and on the need of ex ante and ex post adequate economic policies to cope with such phenomena. The aim of our paper is to provide a theoretical and methodological analysis of the role of conventions as emergent phenomena in financial markets, the latter being thought of as dynamically complex systems. Drawing upon the notion of ‘dynamic complexity’ and Keynes’ view of financial markets, we claim that social conventions can only provisionally stabilize the system, but they will eventually lead to financial instability and crisis. Then, we adopt this framework to investigate the implications for monetary policy to stabilize the system by virtue of the role of central bank to intervene, and thus shape, a convention. In this respect, we consider the credibility of the monetary authority and how it can be exerted through ‘moral suasion’ to control the financial fragility of investors’ balance-sheet positions as well as to affect the convention around the longterm interest rate.

Suggested Citation

  • Citera, Emanuele & Sau, Lino, 2019. "Complexity, Conventions and Instability: the role of monetary policy," Department of Economics and Statistics Cognetti de Martiis. Working Papers 201924, University of Turin.
    • Handle: RePEc:uto:dipeco:201924
    as

    Download full text from publisher

    File URL: https://www.est.unito.it/do/home.pl/Download?doc=/allegati/wp2019dip/wp_24_2019.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Lino Sau, 2013. "Instability and Crisis in Financial Complex Systems," Review of Political Economy, Taylor & Francis Journals, vol. 25(3), pages 496-511, July.
    2. Karl E. Case & Robert J. Shiller & Anne K. Thompson, 2012. "What Have They Been Thinking? Homebuyer Behavior in Hot and Cold Markets," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 43(2 (Fall)), pages 265-315.
    3. Anna Carabelli, 2002. "Speculation and reasonableness: a non-Bayesian theory of rationality," Chapters, in: Shelia C. Dow & John Hillard (ed.), Post Keynesian Econometrics, Microeconomics and the Theory of the Firm, chapter 10, Edward Elgar Publishing.
    4. John B. Davis, 2017. "The Continuing Relevance of Keynes's Philosophical Thinking: Reflexivity, Complexity and Uncertainty," Annals of the Fondazione Luigi Einaudi. An Interdisciplinary Journal of Economics, History and Political Science, Fondazione Luigi Einaudi, Torino (Italy), vol. 51(1), pages 55-76, June.
    5. Florian Heider & Farzad Saidi & Glenn Schepens, 2019. "Life below Zero: Bank Lending under Negative Policy Rates," The Review of Financial Studies, Society for Financial Studies, vol. 32(10), pages 3728-3761.
    6. John H. Miller & Scott E. Page, 2007. "Social Science in Between, from Complex Adaptive Systems: An Introduction to Computational Models of Social Life," Introductory Chapters, in: Complex Adaptive Systems: An Introduction to Computational Models of Social Life, Princeton University Press.
    7. Hommes,Cars, 2015. "Behavioral Rationality and Heterogeneous Expectations in Complex Economic Systems," Cambridge Books, Cambridge University Press, number 9781107564978.
    8. J. Barkley Rosser, 2001. "Alternative Keynesian and Post Keynesian Perspective on Uncertainty and Expectations," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 23(4), pages 545-566, July.
    9. Oliver E. Williamson, 2000. "The New Institutional Economics: Taking Stock, Looking Ahead," Journal of Economic Literature, American Economic Association, vol. 38(3), pages 595-613, September.
    10. Richard Holt & J. Barkley Rosser & David Colander, 2011. "The Complexity Era in Economics," Review of Political Economy, Taylor & Francis Journals, vol. 23(3), pages 357-369.
    11. J. Doyne Farmer, 2002. "Market force, ecology and evolution," Industrial and Corporate Change, Oxford University Press and the Associazione ICC, vol. 11(5), pages 895-953, November.
    12. Anna Maria Carabelli & Mario Aldo Cedrini, 2015. "From Theory to Policy? Keynes’s Distinction Between Apparatus of Thought and Apparatus of Action, with an Eye to the European Debt Crisis," Challenge, Taylor & Francis Journals, vol. 58(6), pages 509-531, November.
    13. Hommes, Cars & Vroegop, Joris, 2019. "Contagion between asset markets: A two market heterogeneous agents model with destabilising spillover effects," Journal of Economic Dynamics and Control, Elsevier, vol. 100(C), pages 314-333.
    14. George Soros, 2013. "Fallibility, reflexivity, and the human uncertainty principle," Journal of Economic Methodology, Taylor & Francis Journals, vol. 20(4), pages 309-329, December.
    15. Christopher L. Foote & Kristopher S. Gerardi & Paul S. Willen, 2012. "Why Did So Many People Make So Many Ex Post Bad Decisions? The Causes of the Foreclosure Crisis," NBER Working Papers 18082, National Bureau of Economic Research, Inc.
    16. Axel Leijonhufvud, 2009. "Out of the corridor: Keynes and the crisis," Cambridge Journal of Economics, Oxford University Press, vol. 33(4), pages 741-757, July.
    17. David Dequech, 2011. "Financial conventions in Keynes's theory: the stock exchange," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 33(3), pages 469-490, April.
    18. Thomas I. Palley & Louis-Philippe Rochon & Guillaume Vallet, 2019. "The economics of negative interest rates," Review of Keynesian Economics, Edward Elgar Publishing, vol. 7(2), pages 135-136, April.
    19. J. Barkley Rosser, 1999. "On the Complexities of Complex Economic Dynamics," Journal of Economic Perspectives, American Economic Association, vol. 13(4), pages 169-192, Fall.
    20. John H. Miller & Scott E. Page, 2007. "Complexity in Social Worlds, from Complex Adaptive Systems: An Introduction to Computational Models of Social Life," Introductory Chapters, in: Complex Adaptive Systems: An Introduction to Computational Models of Social Life, Princeton University Press.
    21. Hommes, Cars & in ’t Veld, Daan, 2017. "Booms, busts and behavioural heterogeneity in stock prices," Journal of Economic Dynamics and Control, Elsevier, vol. 80(C), pages 101-124.
    22. Emanuele Citera, 2017. "Keynes' and the Santa Fe Institute's Complexity: Same Concepts, Different Methods?," Annals of the Fondazione Luigi Einaudi. An Interdisciplinary Journal of Economics, History and Political Science, Fondazione Luigi Einaudi, Torino (Italy), vol. 51(1), pages 207-222, June.
    23. Franklin Allen & Stephen Morris & Hyun Song Shin, 2006. "Beauty Contests and Iterated Expectations in Asset Markets," Review of Financial Studies, Society for Financial Studies, vol. 19(3), pages 719-752.
    24. Steven Pressman, 2019. "How low can we go? The limits of monetary policy," Review of Keynesian Economics, Edward Elgar Publishing, vol. 7(2), pages 137-150, April.
    25. Richard H. Day, 1994. "Complex Economic Dynamics - Vol. 1: An Introduction to Dynamical Systems and Market Mechanisms," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262041413, December.
    26. J. Barkley Rosser Jr. (ed.), 2004. "Complexity in Economics," Books, Edward Elgar Publishing, volume 0, number 2709.
    27. Eric D. Beinhocker, 2013. "Reflexivity, complexity, and the nature of social science," Journal of Economic Methodology, Taylor & Francis Journals, vol. 20(4), pages 330-342, December.
    28. Anwar Shaikh, 2010. "Reflexivity, path dependence, and disequilibrium dynamics," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 33(1), pages 3-16, October.
    29. Thomas I. Palley, 2019. "The fallacy of the natural rate of interest and zero lower bound economics: why negative interest rates may not remedy Keynesian unemployment," Review of Keynesian Economics, Edward Elgar Publishing, vol. 7(2), pages 151-170, April.
    30. J. Rosser & Marina Rosser & Mauro Gallegati, 2012. "A Minsky-Kindleberger Perspective on the Financial Crisis," Journal of Economic Issues, Taylor & Francis Journals, vol. 46(2), pages 449-458.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Emanuele Citera & Lino Sau, 2021. "Reflexivity, Financial Instability and Monetary Policy: A ‘Convention-Based’ Approach," Review of Political Economy, Taylor & Francis Journals, vol. 33(2), pages 327-343, April.
    2. Lino Sau, 2013. "Instability and Crisis in Financial Complex Systems," Review of Political Economy, Taylor & Francis Journals, vol. 25(3), pages 496-511, July.
    3. Mornati, Fiorenzo & Becchio, Giandomenica & Marchionatti, Roberto & Cassata, Francesco, 2009. ""Quando l'economica italiana non era seconda a nessuno" Luigi Einaudi e la Scuola di Economia a Torino," CESMEP Working Papers 200910, University of Turin.
    4. Bolt, Wilko & Demertzis, Maria & Diks, Cees & Hommes, Cars & Leij, Marco van der, 2019. "Identifying booms and busts in house prices under heterogeneous expectations," Journal of Economic Dynamics and Control, Elsevier, vol. 103(C), pages 234-259.
    5. Salter, Alexander & Tarko, Vlad, 2017. "Governing the Financial System: A Theory of Financial Resilience," Working Papers 06954, George Mason University, Mercatus Center.
    6. Laura Gardini & Noemi Schmitt & Iryna Sushko & Fabio Tramontana & Frank Westerhoff, 2019. "Necessary and sufficient conditions for the roots of a cubic polynomial and bifurcations of codimension-1, -2, -3 for 3D maps," Working Papers 1908, University of Urbino Carlo Bo, Department of Economics, Society & Politics - Scientific Committee - L. Stefanini & G. Travaglini, revised 2019.
    7. Alessia De Stefani, 2021. "House price history, biased expectations, and credit cycles: The role of housing investors," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 49(4), pages 1238-1266, December.
    8. Tiziana Assenza & Te Bao & Cars Hommes & Domenico Massaro, 2014. "Experiments on Expectations in Macroeconomics and Finance," Research in Experimental Economics, in: Experiments in Macroeconomics, volume 17, pages 11-70, Emerald Group Publishing Limited.
    9. Robert J. Shiller, 2013. "Reflections on Finance and the Good Society," American Economic Review, American Economic Association, vol. 103(3), pages 402-405, May.
    10. Noemi Schmitt & Frank Westerhoff, 2022. "Speculative housing markets and rent control: insights from nonlinear economic dynamics," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 17(1), pages 141-163, January.
    11. Pancrazi, Roberto & Pietrunti, Mario, 2019. "Natural expectations and home equity extraction," Journal of Housing Economics, Elsevier, vol. 46(C).
    12. Pedro Gete, 2015. "Housing demands, savings gluts and current account dynamics," Globalization Institute Working Papers 221, Federal Reserve Bank of Dallas.
    13. Hommes, Cars H., 2006. "Heterogeneous Agent Models in Economics and Finance," Handbook of Computational Economics, in: Leigh Tesfatsion & Kenneth L. Judd (ed.), Handbook of Computational Economics, edition 1, volume 2, chapter 23, pages 1109-1186, Elsevier.
    14. Fontana, Magda, 2010. "Can neoclassical economics handle complexity? The fallacy of the oil spot dynamic," Journal of Economic Behavior & Organization, Elsevier, vol. 76(3), pages 584-596, December.
    15. Félix-Fernando Muñoz & María-Isabel Encinar, 2019. "Some elements for a definition of an evolutionary efficiency criterion," Journal of Evolutionary Economics, Springer, vol. 29(3), pages 919-937, July.
    16. David M. Frankel & Yu Jin, 2015. "Securitization and Lending Competition," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 82(4), pages 1383-1408.
    17. Luis Armona & Andreas Fuster & Basit Zafar, 2019. "Home Price Expectations and Behaviour: Evidence from a Randomized Information Experiment," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 86(4), pages 1371-1410.
    18. Charles G. Nathanson & Eric Zwick, 2017. "Arrested Development: Theory and Evidence of Supply-Side Speculation in the Housing Market," NBER Working Papers 23030, National Bureau of Economic Research, Inc.
    19. Bolt, Wilko & Demertzis, Maria & Diks, Cees & Hommes, Cars & Leij, Marco van der, 2019. "Identifying booms and busts in house prices under heterogeneous expectations," Journal of Economic Dynamics and Control, Elsevier, vol. 103(C), pages 234-259.
    20. Cameron Hepburn & Eric Beinhocker & J. Doyne Farmer & Alexander Teytelboym, 2014. "Resilient and Inclusive Prosperity within Planetary Boundaries," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 22(5), pages 76-92, September.

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:uto:dipeco:201924. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Piero Cavaleri or Marina Grazioli (email available below). General contact details of provider: https://edirc.repec.org/data/detorit.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.