Real and financial crises: A multi-agent approach

Mark Setterfield and William Gibson

No 1309, Working Papers from Trinity College, 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.”

Keywords: Systemic risk; Crash; Herding; Bayesian learning; Endogenous money; preferential attachment; Agent-based models. (search for similar items in EconPapers)
JEL-codes: B16 C00 D58 E37 G01 G12 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2013-07, Revised 2014-07
New Economics Papers: this item is included in nep-cba and nep-cmp
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http://www3.trincoll.edu/repec/WorkingPapers2013/WP13-09.pdf First version, 2013 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:tri:wpaper:1309

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