Real and Financial Crises

Trinity College Department of Economics Working Paper No. 13-09

36 Pages Posted: 23 Jul 2013

See all articles by Bill Gibson

Bill Gibson

University of Vermont - Department of Economics

Mark Setterfield

New School for Social Research

Date Written: July 2013

Abstract

Previous analyses of macroeconomic imbalances have employed models that either focus exclusively on real-side effects or financial-side disturbances. Structuralist models make the highly unrealistic assumption that financial surplus firms effortlessly and costlessly transfer those surpluses to deficit firms, which 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. This literature focuses exclusively on the financial sector to the neglect of the real economy. In this paper, we build on the MAS model of Setterfield and Budd (2011), relaxing some of the restrictive assumptions regarding the goods market in that model, and adding a financial sector. The latter is inspired by the financial models of Johansen et al. (2000), Sornette (2003), Voit (2005), LeBaron (2012), Thurner et al. (2012), and others. The result is a robust model of the economy in which the real and financial sectors are integrated and interact with one another. The contribution is to show that real financial interactions increase the likelihood of crises, while preferentially attached financial networks decrease financial instability.

Keywords: stock market, crash, bubbles, herding, adaptation, agent-based models

JEL Classification: D58, G01, G12, B16, C00

Suggested Citation

Gibson, Bill and Setterfield, Mark, Real and Financial Crises (July 2013). Trinity College Department of Economics Working Paper No. 13-09, Available at SSRN: https://ssrn.com/abstract=2297117 or http://dx.doi.org/10.2139/ssrn.2297117

Bill Gibson

University of Vermont - Department of Economics ( email )

347 Old Mill
Burlington, VT 05405-4160
United States
802-656-0191 (Phone)

Mark Setterfield (Contact Author)

New School for Social Research ( email )

6 East 16th Street
New York, NY 10003
United States

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