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The Financial Instability Hypothesis:a Stochastic Microfoundation Framework

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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

Paper provided by Quantitative Finance Research Centre, University of Technology, Sydney in its series Research Paper Series with number 273.

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Length: 29
Date of creation: 01 Mar 2010
Date of revision:
Handle: RePEc:uts:rpaper:273

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Keywords: financial fragility; complex dynamics; stochastic aggregation;

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Citations

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Cited by:
  1. Raberto, Marco & Teglio, Andrea & Cincotti, Silvano, 2011. "Debt deleveraging and business cycles: An agent-based perspective," Economics Discussion Papers 2011-31, Kiel Institute for the World Economy.
  2. Dosi, Giovanni & Fagiolo, Giorgio & Napoletano, Mauro & Roventini, Andrea, 2013. "Income distribution, credit and fiscal policies in an agent-based Keynesian model," Journal of Economic Dynamics and Control, Elsevier, vol. 37(8), pages 1598-1625.
  3. 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.
  4. 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.
  5. 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.
  6. 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.
  7. 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.
  8. Carl Chiarella & Corrado Di Guilmi, 2013. "Monetary Policy and Debt Deflation: Some Computational Experiments," CAMA Working Papers 2013-42, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  9. 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.
  10. 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.
  11. 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.

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