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Deleveraging crises and deep recessions: a behavioural approach

Pascal Seppecher () and Isabelle Salle ()

No 14-10, CeNDEF Working Papers from Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance

Abstract: Macroeconomic dynamics are characterized by alternating patterns of periods of relative stability and large swings. Standard micro-founded macro-economic models account for these patterns through exogenous and persistent shocks. In this paper, we develop a fully decentralized and micro-founded macro-economic agent-based model, augmented with an opinion model, which produces endogenous waves of pessimism and optimism that feed back into firms’ leverage and households’ precautionary saving behaviour. A major emergent property of our model is precisely the complex successions of stable and unstable macroeconomic regimes. The model is further able to account for a wide spectrum of macro- and micro empirical regularities. Within this framework, we analyse a series of macro-economic phenomena of key relevance in the current macro-economic debate, especially the occurrence of deleveraging crises and Fisherian debt-deflation recessions. Our analysis suggests that the relative dynamics of prices and wages and the resulting income distribution along a deflationary path are critical determinants of the severity of the recession, and the chances of recovery.

Date: 2014
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Related works:
Journal Article: Deleveraging crises and deep recessions: a behavioural approach (2015) Downloads
Working Paper: Deleveraging crises and deep recessions: a behavioural approach (2015)
Working Paper: Deleveraging crises and deep recessions: a behavioural approach (2014) Downloads
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