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Heterogeneity, distribution and financial fragility of non-financial firms: an agent-based stock-flow consistent (AB-SFC) model

Author

Listed:
  • Ítalo Pedrosa

    (UFRJ - Universidade Federal do Rio de Janeiro [Brasil] = Federal University of Rio de Janeiro [Brazil] = Université fédérale de Rio de Janeiro [Brésil])

  • Dany Lang

    (CEPN - Centre d'Economie de l'Université Paris Nord - UP13 - Université Paris 13 - USPC - Université Sorbonne Paris Cité - CNRS - Centre National de la Recherche Scientifique)

Abstract

In Minsky's Financial Instability Hypothesis (FIH), financial fragility of non-financial firms tends to increase endogenously over the cycle along with the macroeconomic leverage ratio. This analysis has been criticized for two main complementary reasons: firstly, it does not duly consider the aggregate pro-cyclicallity of profits; secondly, due to an overly aggregate analysis, some inferences about the relation between aggregate leverage and systemic fragility are potentially misleading. In this paper, we take these criticisms into account by building an agent-based stock-flow consistent model which integrates the real and financial sides of the economy in a fundamentally dynamic environment. We calibrate and simulate our model and show that the dynamics generated are in line with empirical evidence both at the micro and the macro levels. We create a financial fragility index and examine how systemic financial fragility relates to the aggregate leverage along the cycle. We show that our model yields both Min-skian regimes, in which the aggregate leverage increases along with investment, and Steindlian regimes, where investment brings leverage down. Our key findings are that the sensitivity of financial fragility to aggregate leverage is not as big as assumed in the literature; and that the distribution of profits amongst firms does matter for the stability of the system, both statically (immediately for financial fragility) and dynamically (because of the dynamics of leverage).

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  • Ítalo Pedrosa & Dany Lang, 2018. "Heterogeneity, distribution and financial fragility of non-financial firms: an agent-based stock-flow consistent (AB-SFC) model," Working Papers hal-01937186, HAL.
  • Handle: RePEc:hal:wpaper:hal-01937186
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    1. Severin Reissl, 2021. "Heterogeneous expectations, forecasting behaviour and policy experiments in a hybrid Agent-based Stock-flow-consistent model," Journal of Evolutionary Economics, Springer, vol. 31(1), pages 251-299, January.

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    Keywords

    financial fragility; firms; leverage; cash flow; distribution;
    All these keywords.

    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • D39 - Microeconomics - - Distribution - - - Other
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G01 - Financial Economics - - General - - - Financial Crises
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

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