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Search for profits and business fluctuations: How does banks’ behaviour explain cycles?

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  • Ciola, Emanuele
  • Gaffeo, Edoardo
  • Gallegati, Mauro

Abstract

This paper develops and estimates a macroeconomic model of real-financial markets interactions in which the behaviour of banks generates endogenous business cycles. We do so in the context of a computational agent-based framework, where the channelling of funds from depositors to investors occurring through intermediaries is affected by information and matching frictions. Since banks compete in both deposit and credit markets, the whole dynamic is driven by endogenous fluctuations in their profits. In particular, we assume that intermediaries adopt a simple learning process, which consists of copying the strategy of the most profitable competitors while setting their interest rates. Accordingly, the emergence of strategic complementarity in the behaviour of banks – mainly due to the accumulation of information capital – leads to periods of sustained growth followed by sharp recessions in the simulated economy.

Suggested Citation

  • Ciola, Emanuele & Gaffeo, Edoardo & Gallegati, Mauro, 2022. "Search for profits and business fluctuations: How does banks’ behaviour explain cycles?," Journal of Economic Dynamics and Control, Elsevier, vol. 135(C).
  • Handle: RePEc:eee:dyncon:v:135:y:2022:i:c:s016518892100227x
    DOI: 10.1016/j.jedc.2021.104292
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    More about this item

    Keywords

    Agent-based macroeconomics; Simulation-based estimation; Intermediaries behaviour; Business cycles;
    All these keywords.

    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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