A Game Theoretic Model of Economic Crises

Jonathan Welburn () and Kjell Hausken

No 2014/23, UiS Working Papers in Economics and Finance from 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

Keywords: Contagion; financial risk; game theory; bank; central bank; country; firms; households; consumption; production; capital; default; borrow; lend; financial friction; shock; sensitivity analysis (search for similar items in EconPapers)
JEL-codes: A10 (search for similar items in EconPapers)
Pages: 10 pages
Date: 2014-12-04
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Journal Article: A game theoretic model of economic crises (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:hhs:stavef:2014_023

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