IDEAS home Printed from https://ideas.repec.org/p/lev/wrkpap/wp_1114.html

Macroeconomic Fragility Effects of Financial Innovation: Behavioral and Decentralized Finance and Artificial Intelligence

Author

Listed:
  • Dimitri B. Papadimitriou

Abstract

There seems to be a building consensus of global uncertainty and instability. This can be observed not only from surveys, the media, and country reports, but in the recent speeches by members of the Federal Reserve Board of Governors. The Fed speeches focus on financial stability, not the usual price stability, but that of the financial system. Not surprising, given the unstable conditions of the US economy emanating from the geopolitical conflicts in the Middle East and elsewhere, is the excessive volatility and overvaluation of the equity markets and the public sector's erratic fiscal and trade policy stance. Reports show that equity funds loaded with AI investments--what we may call "emotional investments"--are now looking to unload them in the financial market, adding more fuel to market volatility that may cause a financial crisis, reminiscent of previous crises. The solution may lie in the implementation of a totally new economic regime in answer to recurring macroeconomic fragility. This paper considers the current conditions of macroeconomic fragility. It explores the challenges and risks to financial system stability that emerge from innovation-developed and increasingly decentralized finance--including the effects of cryptoassets, tokenization of digital assets, and artificial intelligence.

Suggested Citation

  • Dimitri B. Papadimitriou, 2026. "Macroeconomic Fragility Effects of Financial Innovation: Behavioral and Decentralized Finance and Artificial Intelligence," Economics Working Paper Archive wp_1114, Levy Economics Institute.
    • Handle: RePEc:lev:wrkpap:wp_1114
    as

    Download full text from publisher

    File URL: https://www.levyinstitute.org/wp-content/uploads/2026/05/wp_1114.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Matteo Aquilina & Giulio Cornelli & Jon Frost & Leonardo Gambacorta, 2025. "Cryptocurrencies and decentralised finance: functions and financial stability implications," BIS Papers, Bank for International Settlements, number 156.
    2. Vincent Barnett, 2015. "Keynes and the Psychology of Economic Behavior: From Stout and Sully to The General Theory," History of Political Economy, Duke University Press, vol. 47(2), pages 307-333, June.
    3. George A. Akerlof, 2009. "How Human Psychology Drives the Economy and Why It Matters," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 91(5), pages 1175-1175.
    4. Sheila C. Dow, 2011. "Cognition, market sentiment and financial instability," Cambridge Journal of Economics, Cambridge Political Economy Society, vol. 35(2), pages 233-249.
    5. Leonardo Burlamaqui, 2025. "Creative Destruction Meets Financial Instability: Toward a New Synthesis," Economics Working Paper Archive wp_1098, Levy Economics Institute.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Dow Alexander & Dow Sheila C., 2011. "Animal Spirits Revisited," Capitalism and Society, De Gruyter, vol. 6(2), pages 1-25, December.
    2. Zamri Ahmad & Haslindar Ibrahim & Jasman Tuyon, 2017. "Institutional investor behavioral biases: syntheses of theory and evidence," Management Research Review, Emerald Group Publishing Limited, vol. 40(5), pages 578-603, May.
    3. Tianhao Zhi, 2016. "Animal Spirits and Financial Instability - A Disequilibrium Macroeconomic Perspective," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 1-2016, January-A.
    4. Gerasimos T. Soldatos & Erotokritos Varelas, 2015. "A first formal approach to animal spirits beyond uncertainty," European Journal of Government and Economics, Europa Grande, vol. 4(2), pages 104-117, December.
    5. Zamri Ahmad & Haslindar Ibrahim & Jasman Tuyon, 2017. "Behavior of fund managers in Malaysian investment management industry," Qualitative Research in Financial Markets, Emerald Group Publishing Limited, vol. 9(3), pages 205-239, August.
    6. Gabe de Bondt, 2017. "Confidence and monetary policy transmission," EcoMod2017 10197, EcoMod.
    7. Stern, Nicholas, 2018. "Public economics as if time matters: Climate change and the dynamics of policy," Journal of Public Economics, Elsevier, vol. 162(C), pages 4-17.
    8. Jang, Tae-Seok & Sacht, Stephen, 2017. "Modeling consumer confidence and its role for expectation formation: A horse race," Economics Working Papers 2017-04, Christian-Albrechts-University of Kiel, Department of Economics.
    9. Roy, Saktinil & Kemme, David M., 2012. "Causes of banking crises: Deregulation, credit booms and asset bubbles, then and now," International Review of Economics & Finance, Elsevier, vol. 24(C), pages 270-294.
    10. Klodt, Henning & Lehment, Harmen (ed.), 2009. "The Crisis and Beyond," Kiel E-Books, Kiel Institute for the World Economy, number 60981.
    11. Gambetta, Nicolás & García-Benau, María Antonia & Zorio-Grima, Ana, 2016. "Data analytics in banks' audit: The case of loan loss provisions in Uruguay," Journal of Business Research, Elsevier, vol. 69(11), pages 4793-4797.
    12. Hendrik Dalen & Kène Henkens, 2013. "Dilemmas of Downsizing During the Great Recession: Crisis Strategies of European Employers," De Economist, Springer, vol. 161(3), pages 307-329, September.
    13. Benjamin Enke & Florian Zimmermann, 2019. "Correlation Neglect in Belief Formation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 86(1), pages 313-332.
    14. George Kapetanios & James Mitchell & Yongcheol Shin, 2010. "A Nonlinear Panel Model of Cross-sectional Dependence," Working Papers 673, Queen Mary University of London, School of Economics and Finance.
    15. Andreia Tolciu, 2010. "The Economics of Social Interactions: An Interdisciplinary Ground for Social Scientists?," Forum for Social Economics, Taylor & Francis Journals, vol. 39(3), pages 223-242, January.
    16. J. E. King, 2010. "Keynes and ‘Psychology’," Economic Papers, The Economic Society of Australia, vol. 29(1), pages 1-12, March.
    17. Kenji Nishizaki & Toshitaka Sekine & Yoichi Ueno, 2014. "Chronic Deflation in Japan," Asian Economic Policy Review, Japan Center for Economic Research, vol. 9(1), pages 20-39, January.
    18. Venkatasubramanian, Venkat & Luo, Yu & Sethuraman, Jay, 2015. "How much inequality in income is fair? A microeconomic game theoretic perspective," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 435(C), pages 120-138.
    19. Ulrich van Suntum, "undated". "Economic Confidence, Negative Interest Rates, and Liquidity: Towards Keynesianism 2.0," Working Papers 200108, Institute of Spatial and Housing Economics, Munster Universitary.
    20. Koppl, Roger, 2010. "Some epistemological implications of economic complexity," Journal of Economic Behavior & Organization, Elsevier, vol. 76(3), pages 859-872, December.

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;
    ;

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Systems; Standards; Regimes; Government and the Monetary System
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:lev:wrkpap:wp_1114. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Karley Sullivan (email available below). General contact details of provider: https://www.levyinstitute.org .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.