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Real and financial crises: A multi-agent approach

Author

Listed:
  • Mark Setterfield

    () (Department of Economics, Trinity College)

  • Bill Gibson

    () (Department of Economics,)

Abstract

Previous analyses of macroeconomic imbalances have employed models that either focus exclusively on real-side effects or financial-side disturbances. Real-side models usually make the unrealistic assumption that firms that save more than they invest effortlessly and costlessly transfer those surpluses to deficit firms, firms that require additional savings to sustain their plans for capital accumulation. On the other hand, there exists a well-developed, rigorous and elegant literature that uses the multi-agent systems (MAS) approach to analyze the recent financial crisis. These stand-alone models of the financial sector focus on the network structure of financial interplay but typically ignore real side interactions. In this paper, we develop a MAS model that integrates real and financial elements. The focus remains on the network structure and it is seen that randomly connected networks are more crash prone than are preferentially attached networks of financial agents. when real-financial interactions are taken into account. The results cast doubt on the connection between systemic risk and financial entities that are “too big or too linked to fail.”

Suggested Citation

  • Mark Setterfield & Bill Gibson, 2013. "Real and financial crises: A multi-agent approach," Working Papers 1309, Trinity College, Department of Economics, revised Jul 2014.
  • Handle: RePEc:tri:wpaper:1309
    as

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    File URL: http://internet2.trincoll.edu/repec/WorkingPapers2013/WP13-09.pdf
    File Function: First version, 2013
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Systemic risk; Crash; Herding; Bayesian learning; Endogenous money; preferential attachment; Agent-based models.;

    JEL classification:

    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • G01 - Financial Economics - - General - - - Financial Crises
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • B16 - Schools of Economic Thought and Methodology - - History of Economic Thought through 1925 - - - Quantitative and Mathematical
    • C00 - Mathematical and Quantitative Methods - - General - - - General

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