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Title:A behavioral macroeconomic model with endogenous boom-bust cycles and leverage dynamcis PDF Logo
Authors:Scheffknecht, Lukas
Geiger, Felix
Issue Date:2011
Series/Report no.:FZID discussion papers 37-2011
Abstract:We merge a financial market model with leverage-constrained, heterogeneous agents with a reduced-form version of the New-Keynesian standard model. Agents in both submodels are assumed to be boundedly rational. The fi nancial market model produces endogenously arising boom-bust cycles. It is also capable to generate highly non-linear deleveraging processes, fi re sales and ultimately a default scenario. Asset price booms are triggered via self-fulfilling prophecies. Asset price busts are induced by agents' choice of an increasingly fragile balance sheet structure during good times. Their vulnerability is inevitably revealed by small, randomly occurring shocks. Our transmission channel of financial market activity to the real sector embraces a recent strand of literature shedding light on the link between the active balance sheet management of financial market participants, the induced procyclical fluctuations of desired risk compensations and their final impact on the real economy. We show that a systematic central bank reaction on financial market developments dampens macroeconomic volatility considerably. Furthermore, restricting leverage in a countercyclical fashion limits the magnitude of financial cycles and hence their impact on the real economy.
Subjects:behavioral economics
New-Keynesian macroeconomics
monetary policy
agent-based financial market model
leverage
macroprudential regulation
financial stability
asset price bubbles
systemic risk
JEL:E31
E41
E47
E52
Persistent Identifier of the first edition:urn:nbn:de:bsz:100-opus-6628
Document Type:Working Paper
Appears in Collections:FZID Discussion Papers, Universität Hohenheim

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