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A Game Theoretic Model of Economic Crises

Author

Listed:
  • Welburn, Jonathan

    (U Wisconsin)

  • Hausken, Kjell

    (University of Stavanger)

Abstract

Global financial crises have revealed the systemic risk posed by economic contagion as the increasing interconnectedness of the global economy has allowed adverse events to spread across countries more easily. These adverse economic events can be attributed to contagion through either credit or trade channels, or to common macroeconomic conditions that cause adverse events in multiple countries even without contagion. We model this system as a game between five types of players: countries; central banks; banks; firms; and households. In this framework, we model strategic choices, conduct sensitivity analysis, and analyze the impacts of random shocks in two examples. Our results demonstrate that each of the three causes discussed above (contagion through credit channels, contagion through trade channels, or common macroeconomic conditions with no contagion) can lead to crises even if all agents in the model behave rationally

Suggested Citation

  • Welburn, Jonathan & Hausken, Kjell, 2014. "A Game Theoretic Model of Economic Crises," UiS Working Papers in Economics and Finance 2014/23, University of Stavanger.
  • Handle: RePEc:hhs:stavef:2014_023
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    Cited by:

    1. Welburn, Jonathan William & Hausken, Kjell, 2015. "A Game-Theoretic Model with Empirics of Economic Crises," UiS Working Papers in Economics and Finance 2015/7, University of Stavanger.
    2. Jonathan William Welburn & Kjell Hausken, 2017. "Game Theoretic Modeling of Economic Systems and the European Debt Crisis," Computational Economics, Springer;Society for Computational Economics, vol. 49(2), pages 177-226, February.
    3. Jonathan W. Welburn, 2020. "Crises Beyond Belief: Findings on Contagion, the Role of Beliefs, and the Eurozone Debt Crisis from a Borrower–Lender Game," Computational Economics, Springer;Society for Computational Economics, vol. 56(2), pages 263-317, August.
    4. Anubha Goel & Aparna Mehra, 2019. "Analyzing Contagion Effect in Markets During Financial Crisis Using Stochastic Autoregressive Canonical Vine Model," Computational Economics, Springer;Society for Computational Economics, vol. 53(3), pages 921-950, March.

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    More about this item

    Keywords

    Contagion; financial risk; game theory; bank; central bank; country; firms; households; consumption; production; capital; default; borrow; lend; financial friction; shock; sensitivity analysis;
    All these keywords.

    JEL classification:

    • A10 - General Economics and Teaching - - General Economics - - - General

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