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Housing market bubbles and business cycles in an agent-based credit economy

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  • Erlingsson, Einar Jon
  • Cincotti, Silvano
  • Stefansson, Hlynur
  • Sturlusson, Jon Thor
  • Teglio, Andrea
  • Raberto, Marco

Abstract

In this paper the authors present an agent-based model of a credit network economy. The artificial economy includes different economic agents that interact using simple behavioral rules through various markets, i.e., the consumption goods market, the labor market, the credit market and the housing market. A set of computational experiments, based on numerical simulations of the model, have been carried out in order to explore the effects of different households' creditworthiness conditions required by the banking system to grant a mortgage. The authors find that easier access to credit inflates housing prices, triggering a short run output expansion, mainly due to the wealth effect. Also, with a more permissive policy towards household mortgages, and thus higher levels of credit, the artificial economy becomes more unstable and prone to recessions usually caused by falling housing prices. Often the authors find that an initial crisis can leave firms in a fragile state. If the situation is not cured, a subsequent crisis can lead to mass bankruptcies of firms with catastrophic effects on the credit sector and on the real economy. With stricter conditions on household mortgages the economy is more stable and does not fall into serious recessions, although a too severe regulation can slow down economic growth. --

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Bibliographic Info

Paper provided by Kiel Institute for the World Economy in its series Economics Discussion Papers with number 2013-32.

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Date of creation: 2013
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Handle: RePEc:zbw:ifwedp:201332

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Keywords: Credit cycles; housing market; agent-based model; subprime lending;

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  1. Giovanni Dosi & Giorgio Fagiolo & Mauro Napoletano & Andrea Roventini, 2012. "Income Distribution, Credit and Fiscal Policies in an Agent-Based Keynesian Model," LEM Papers Series 2012/03, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
  2. Césaire Meh & Kevin Moran, 2008. "The Role of Bank Capital in the Propagation of Shocks," Working Papers 08-36, Bank of Canada.
  3. Karl E. Case & Robert J. Shiller & John M. Quigley, 2001. "Comparing Wealth Effects: The Stock Market Versus the Housing Market," NBER Working Papers 8606, National Bureau of Economic Research, Inc.
  4. Smets, Frank & Wouters, Raf, 2002. "An estimated stochastic dynamic general equilibrium model of the euro area," Working Paper Series 0171, European Central Bank.
  5. Carroll, Christopher D. & Otsuka, Misuzu & Slacalek, Jiri, 2010. "How large are housing and financial wealth effects? A new approach," Working Paper Series 1283, European Central Bank.
  6. Deaton, A., 1991. "Household Saving in LDC'S: Credit Markets, Insurance, And Welfare," Papers 153, Princeton, Woodrow Wilson School - Development Studies.
  7. Christopher D. Carroll, 2001. "A Theory of the Consumption Function, with and without Liquidity Constraints," Journal of Economic Perspectives, American Economic Association, vol. 15(3), pages 23-45, Summer.
  8. 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.
  9. Alan P. Kirman, 1992. "Whom or What Does the Representative Individual Represent?," Journal of Economic Perspectives, American Economic Association, vol. 6(2), pages 117-136, Spring.
  10. Giovanni Dosi & Giorgio Fagiolo & Andrea Roventini, 2008. "Schumpeter Meeting Keynes: A Policy-Friendly Model of Endogenous Growth and Business Cycles," Working Papers 50/2008, University of Verona, Department of Economics.
  11. Andrea Teglio & Marco Raberto & Silvano Cincotti, 2012. "The Impact Of Banks' Capital Adequacy Regulation On The Economic System: An Agent-Based Approach," Advances in Complex Systems (ACS), World Scientific Publishing Co. Pte. Ltd., vol. 15(su), pages 1250040-1-1.
  12. Frank Smets & Raf Wouters, 2002. "Monetary policy in an estimated stochastic dynamic general equilibrium model of the Euro area," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
  13. Kirman, Alan, 1989. "The Intrinsic Limits of Modern Economic Theory: The Emperor Has No Clothes," Economic Journal, Royal Economic Society, vol. 99(395), pages 126-39, Supplemen.
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