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ResearchPaper
2011
A behavioral macroeconomic model with endogenous boom-bust cycles and leverage dynamcis
A behavioral macroeconomic model with endogenous boom-bust cycles and leverage dynamcis
Abstract (English)
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 financial market model produces endogenously arising boom-bust cycles. It is also capable to generate highly non-linear deleveraging processes, fire 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.
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Publication license
Publication series
FZID discussion papers; 37
Published in
Faculty
State Institutes
Faculty of Business, Economics and Social Sciences
Faculty of Business, Economics and Social Sciences
Institute
Forschungszentrum Innovation und Dienstleistung
Institute of Economics
Institute of Economics
Examination date
Supervisor
Edition / version
Citation
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DOI
ISSN
ISBN
Language
English
Publisher
Publisher place
Classification (DDC)
330 Economics
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Standardized keywords (GND)
Sustainable Development Goals
BibTeX
@techreport{Scheffknecht2011,
url = {https://hohpublica.uni-hohenheim.de/handle/123456789/5542},
author = {Scheffknecht, Lukas and Geiger, Felix},
title = {A behavioral macroeconomic model with endogenous boom-bust cycles and leverage dynamcis},
year = {2011},
school = {Universität Hohenheim},
series = {FZID discussion papers},
}