Deleveraging crises and deep recessions: a behavioural approach

Authored by Pascal Seppecher, Isabelle Salle

Date Published: 2015

DOI: 10.1080/00036846.2015.1021456

Sponsors: European Union

Platforms: Java

Model Documentation: Other Narrative Mathematical description

Model Code URLs: https://github.com/pseppecher/jamel

Abstract

Macroeconomic dynamics are characterized by alternating patterns of periods of relative stability and large swings. Standard microfounded macroeconomic models account for these patterns through exogenous and persistent shocks. In this article, we develop a fully decentralized and microfounded macroeconomic agent-based model, augmented with an opinion model, which produces endogenous waves of pessimism and optimism that feed back into firms' leverage and households' precautionary saving behaviour. A major emergent property of our model is precisely the complex successions of stable and unstable macroeconomic regimes. The model is further able to account for a wide spectrum of macro and micro empirical regularities. Within this framework, we analyse a series of macroeconomic phenomena of key relevance in the current macroeconomic debate, especially the occurrence of deleveraging crises and Fisherian debt-deflation recessions. Our analysis suggests that the relative dynamics of prices and wages and the resulting income distribution along a deflationary path are critical determinants of the severity of the recession and the chances of recovery.

Tags

Dynamics Distributions Model law Markets Tails Income-distribution Consumption Wages Debt