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Banks, Market Organization, and Macroeconomic Performance: An Agent-Based Computational Analysis

Quamrul Ashraf (), Boris Gershman () and Peter Howitt ()

No 2011-03, Department of Economics Working Papers from Department of Economics, Williams College

Abstract: This paper is an exploratory analysis of the role that banks play in supporting what Jevons called the "mechanism of exchange." It considers a model economy in which exchange activities are facilitated and coordinated by a self-organizing network of entrepreneurial trading firms. Collectively, these firms play the part of the Walrasian auctioneer, matching buyers with sellers and helping the economy to reach prices at which peoples' trading plans are mutually compatible. Banks affect macroeconomic performance in this economy because their lending activities facilitate the entry and influence the exit decisions of trading firms. Both entry and exit have ambiguous effects on performance, and we resort to computational analysis to understand how they are resolved. Our analysis draws an important distinction between normal and worst-case scenarios, with the economy experiencing systemic breakdowns in the latter. We show that banks can provide a "financial stabilizer" that more than counteracts the familiar financial accelerator, and that the stabilizing role of the banking system is particularly apparent in worst-case scenarios. In line with this result, we also find that under less restrictive lending standards banks are able to more effectively improve macroeconomic performance in the worst-case scenarios.

Keywords: Agent-based computational model; Market organization; Banking system; Macroeconomic stability; Financial stabilizer (search for similar items in EconPapers)
JEL-codes: C63 E00 E63 G20 G28 (search for similar items in EconPapers)
Date: 2011-05, Revised 2016-09
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Published in the Journal of Economic Behavior and Organization, March 2017, 135, pp. 143-180.

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Related works:
Journal Article: Banks, market organization, and macroeconomic performance: An agent-based computational analysis (2017) Downloads
Working Paper: Banks, Market Organization, and Macroeconomic Performance: An Agent-Based Computational Analysis (2015) Downloads
Working Paper: Banks, Market Organization, and Macroeconomic Performance: An Agent-Based Computational Analysis (2011) Downloads
Working Paper: Banks, Market Organization, and Macroeconomic Performance: An Agent-Based Computational Analysis (2011) Downloads
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