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Financial instability and debt deflation dynamics in a bottom-up approach

Listed author(s):
  • Carl Chiarella


    (Finance Discipline Group - University of Technology, Sydney)

  • Corrado Di Guilmi


    (Economics Discipline Group - University of Technology, Sydney)

In this paper we expand the agent based model introduced by Chiarella and Di Guilmi (Chiarella, C. and Di Guilmi, C., The financial instability hypothesis: A stochastic microfoundation framework. Journal of Economic Dynamics and Control, 35(8):1151 – 1171, 2011) in which the business cycle originates by the modifications in firms' balance sheets induced by their investment decisions. During periods of market euphoria, firms increase their capital stock and their level of debt. At the same time the increasing availability of liquidity for investors causes inflation in asset price. When firms' debt reaches an unsustainable level the virtuous cycle is reversed in a depression. We modify the original model in order to study the impact of the dependence of firms' expectations on the stock market performance and of the rise in the proportion of Ponzi firms. We also run a further computational experiment to assess the effect of the buy-back of firms' shares.

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Article provided by AccessEcon in its journal Economics Bulletin.

Volume (Year): 34 (2014)
Issue (Month): 1 ()
Pages: 125-132

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Handle: RePEc:ebl:ecbull:eb-13-00662
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  1. Ryoo, Soon, 2010. "Long waves and short cycles in a model of endogenous financial fragility," Journal of Economic Behavior & Organization, Elsevier, vol. 74(3), pages 163-186, June.
  2. Chiarella, C. & Di Guilmi, C., 2017. "Monetary Policy And Debt Deflation: Some Computational Experiments," Macroeconomic Dynamics, Cambridge University Press, vol. 21(01), pages 214-242, January.
  3. 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.
  4. Chiarella, Carl & Di Guilmi, Corrado, 2011. "The financial instability hypothesis: A stochastic microfoundation framework," Journal of Economic Dynamics and Control, Elsevier, vol. 35(8), pages 1151-1171, August.
  5. Myers, Stewart C., 1984. "Capital structure puzzle," Working papers 1548-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  6. Myers, Stewart C, 1984. " The Capital Structure Puzzle," Journal of Finance, American Finance Association, vol. 39(3), pages 575-592, July.
  7. Stewart C. Myers, 1984. "Capital Structure Puzzle," NBER Working Papers 1393, National Bureau of Economic Research, Inc.
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