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Housing market bubbles and business cycles in an agent-based credit economy

Author

Listed:
  • Erlingsson, Einar Jon
  • Cincotti, Silvano
  • Stefansson, Hlynur
  • Sturlusson, Jon Thor
  • Teglio, Andrea
  • Raberto, Marco

Abstract

In this paper the authors present an agent-based model of a credit network economy. The artificial economy includes different economic agents that interact using simple behavioral rules through various markets, i.e., the consumption goods market, the labor market, the credit market and the housing market. A set of computational experiments, based on numerical simulations of the model, have been carried out in order to explore the effects of different households' creditworthiness conditions required by the banking system to grant a mortgage. The authors find that easier access to credit inflates housing prices, triggering a short run output expansion, mainly due to the wealth effect. Also, with a more permissive policy towards household mortgages, and thus higher levels of credit, the artificial economy becomes more unstable and prone to recessions usually caused by falling housing prices. Often the authors find that an initial crisis can leave firms in a fragile state. If the situation is not cured, a subsequent crisis can lead to mass bankruptcies of firms with catastrophic effects on the credit sector and on the real economy. With stricter conditions on household mortgages the economy is more stable and does not fall into serious recessions, although a too severe regulation can slow down economic growth.

Suggested Citation

  • Erlingsson, Einar Jon & Cincotti, Silvano & Stefansson, Hlynur & Sturlusson, Jon Thor & Teglio, Andrea & Raberto, Marco, 2013. "Housing market bubbles and business cycles in an agent-based credit economy," Economics Discussion Papers 2013-32, Kiel Institute for the World Economy (IfW).
  • Handle: RePEc:zbw:ifwedp:201332
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    References listed on IDEAS

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    1. Christopher D. Carroll & Misuzu Otsuka & Jiri Slacalek, 2011. "How Large Are Housing and Financial Wealth Effects? A New Approach," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(1), pages 55-79, February.
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    10. Raberto, Marco & Teglio, Andrea & Cincotti, Silvano, 2012. "Debt, deleveraging and business cycles: An agent-based perspective," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy (IfW), vol. 6, pages 1-49.
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    Cited by:

    1. repec:spr:italej:v:3:y:2017:i:3:d:10.1007_s40797-017-0060-4 is not listed on IDEAS
    2. Baptista, Rafa & Farmer, J. Doyne & Hinterschweiger, Marc & Low, Katie & Tang, Daniel & Uluc, Arzu, 2016. "Macroprudential policy in an agent-based model of the UK housing market," Bank of England working papers 619, Bank of England.
    3. Alberto Russo, 2017. "An Agent Based Macroeconomic Model with Social Classes and Endogenous Crises," Italian Economic Journal: A Continuation of Rivista Italiana degli Economisti and Giornale degli Economisti, Springer;Società Italiana degli Economisti (Italian Economic Association), vol. 3(3), pages 285-306, November.
    4. Klimek, Peter & Poledna, Sebastian & Doyne Farmer, J. & Thurner, Stefan, 2015. "To bail-out or to bail-in? Answers from an agent-based model," Journal of Economic Dynamics and Control, Elsevier, vol. 50(C), pages 144-154.
    5. Marco Raberto & Bulent Ozel & Linda Ponta & Andrea Teglio & Silvano Cincotti, 2016. "From financial instability to green finance: the role of banking and monetary policies in the Eurace model," Working Papers 2016/07, Economics Department, Universitat Jaume I, Castellón (Spain).
    6. Andrea Teglio & Andrea Mazzocchetti & Linda Ponta & Marco Raberto & Silvano Cincotti, 2015. "Budgetary rigour with stimulus in lean times: Policy advices from an agent-based model," Working Papers 2015/07, Economics Department, Universitat Jaume I, Castellón (Spain).

    More about this item

    Keywords

    Credit cycles; housing market; agent-based model; subprime lending;

    JEL classification:

    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets
    • R38 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Government Policy

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