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Title:Causes of financial instability PDF Logo
Authors:Bezemer, Dirk
Issue Date:2011
Series/Report no.:Working paper, Levy Economics Institute 665
Abstract:Given the economy's complex behavior and sudden transitions as evidenced in the 2007-08 crisis, agent-based models are widely considered a promising alternative to current macroeconomic practice dominated by DSGE models. Their failure is commonly interpreted as a failure to incorporate heterogeneous interacting agents. This paper explains that complex behavior and sudden transitions also arise from the economy's financial structure as reflected in its balance sheets, not just from heterogeneous interacting agents. It introduces flow-of-funds and accounting models, which were preeminent in successful anticipations of the recent crisis. In illustration, a simple balance-sheet model of the economy is developed to demonstrate that nonlinear behavior and sudden transition may arise from the economy's balance-sheet structure, even without any microfoundations. The paper concludes by discussing one recent example of combining flow-of-funds and agent-based models. This appears a promising avenue for future research.
Subjects:credit crisis
finance
complex systems
DSGE
agent-based models
stockflow consistent models
JEL:B52
C63
E32
E37
E44
Document Type:Working Paper
Appears in Collections:Working Papers, Levy Economics Institute of Bard College

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