Dysfunctional banking system, credit bubble and macroeconomic instability in a complex, dynamic monetary economy
Pascal Seppecher Centre d’Etudes en Macroéconomie et Finance Internationale - Université de Nice Sophia Antipolis 4th Bi-Annual Conference
“The financial and monetary crisis” Centre d’Etudes Monétaires et Financières - Université de Bourgogne - Dijon
December
Pascal Seppecher (CEMAFI)
Agent-based Computational Economics
December 10, 2009
1 / 16
Contents
1
An Agent-based Macroeconomic Model with Endogenous Money Complex Systems Complexity Economics Agent-based Computational Modelling Heterogenous agents & endogenous money
2
Simulations Baseline simulation Productivity shock Expenditure shock Flexibility shock Regulation Credit Bubble
3
Conclusion
Pascal Seppecher (CEMAFI)
Agent-based Computational Economics
December 10, 2009
2 / 16
An Agent-based Macroeconomic Model with Endogenous Money
1
An Agent-based Macroeconomic Model with Endogenous Money Complex Systems Complexity Economics Agent-based Computational Modelling Heterogenous agents & endogenous money
2
Simulations
3
Conclusion
Pascal Seppecher (CEMAFI)
Agent-based Computational Economics
December 10, 2009
3 / 16
An Agent-based Macroeconomic Model with Endogenous Money
Complex Systems
Complex Systems Definition A system is typically defined to be complex if its exhibits the following two properties : The system is composed of interacting units, The system exhibits emergent properties, that is, properties arising from the interactions of the units that are not properties of the individual units themselves. L. Tesfatsion, Agent-based Computational Economics : a constructive approach to economic theory (2006)
Pascal Seppecher (CEMAFI)
Agent-based Computational Economics
December 10, 2009
4 / 16
An Agent-based Macroeconomic Model with Endogenous Money
Complexity Economics
Complexity Economics An economy is an evolving, complex adaptative dynamic system (. . .) A.Leionhufvud, Agent-based Macro (2006)
Agent-based computational methods provide the only way in wich the self-regulatory capabilities of complex dynamic models can be explored so as to advance our understanding of the adaptative dynamics of actual economies. A.Leionhufvud, Agent-based Macro (2006)
Pascal Seppecher (CEMAFI)
Agent-based Computational Economics
December 10, 2009
5 / 16
An Agent-based Macroeconomic Model with Endogenous Money
Agent-based Computational Modelling
Agent-based Computational Modelling Definition An agent-based model is a computerized simulation of a number of decision-makers (agents) and institutions, which interact through prescribed rules. The agents can be as diverse as needed (. . .) J. Doyne Farmer & Duncan Foley, The Economy Needs Agent-Based Modelling (2009)
Such models do not rely on the assumption that the economy will move towards a predetermined equilibrium state, as other models do. Instead, at any given time, each agent acts according to its current situation, the state of the world around it and the rules governing its behaviour. J. Doyne Farmer & Duncan Foley, The Economy Needs Agent-Based Modelling (2009)
Pascal Seppecher (CEMAFI)
Agent-based Computational Economics
December 10, 2009
6 / 16
An Agent-based Macroeconomic Model with Endogenous Money
Heterogenous agents & endogenous money
Heterogenous agents & endogenous money An agent-based model 1000 households, 100 firms, 1 bank.
A monetary production economy model bank credit is the only source of money creation, production financing is the only motive of credit.
A computational model implemented in Java, in-line interactive software. Pascal Seppecher (CEMAFI)
Agent-based Computational Economics
December 10, 2009
7 / 16
Simulations
1
An Agent-based Macroeconomic Model with Endogenous Money
2
Simulations Baseline simulation Productivity shock Expenditure shock Flexibility shock Regulation Credit Bubble
3
Conclusion
Pascal Seppecher (CEMAFI)
Agent-based Computational Economics
December 10, 2009
8 / 16
Simulations
Baseline simulation
Baseline simulation The model exhibits : a stable rate of return, a stable real wage, a stable income distribution.
The stabilization of the income distribution is not directly deductible nor from microeconomic behavior assigned to agents neither from structure imposed by monetary flows. Launch simulation
Pascal Seppecher (CEMAFI)
Agent-based Computational Economics
December 10, 2009
9 / 16
Simulations
Productivity shock
Productivity shock In this experimentation we simulate a productivity shock by changing the average productivity (p).
before the shock p = 100 after the shock p = 130 shock year = 2030
Launch simulation
Pascal Seppecher (CEMAFI)
Agent-based Computational Economics
December 10, 2009
10 / 16
Simulations
Expenditure shock
Expenditure shock In this experimentation we simulate a negative expenditure shock by changing the households saving propensity (s).
before the shock s = 0.05 after the shock s = 0.11 shock year = 2030
Launch simulation
Pascal Seppecher (CEMAFI)
Agent-based Computational Economics
December 10, 2009
11 / 16
Simulations
Flexibility shock
Flexibility shock In this experimentation we simulate a flexibility shock by changing the households resistance to cuts in money wages (r ).
before the shock r = 8 after the shock r = 3 shock year = 2030
Launch simulation
Pascal Seppecher (CEMAFI)
Agent-based Computational Economics
December 10, 2009
12 / 16
Simulations
Regulation
Regulation The previous experimentation has shown how a flexibility shock can lead the system to a deflation crisis. In the curent experimentation we ¯ restoring rigidity in simulate the introduction of a minimum wage (w), the labor market after the flexibility shock.
¯ = 205 w year = 2045
Launch simulation
Pascal Seppecher (CEMAFI)
Agent-based Computational Economics
December 10, 2009
13 / 16
Simulations
Credit Bubble
Credit Bubble In this experimentation we introduce an unprofitable firm to the model. The bank continuously lends to this firm. So the non-profitable firm is engaged in a Ponzi scheme because it can only repay its debt by means of new debts.
Firms average productivity p = 100
ˇ = 10 Ponzi firm productivity p Ponzi firm introduction year = 2045 Launch simulation
Pascal Seppecher (CEMAFI)
Agent-based Computational Economics
December 10, 2009
14 / 16
Conclusion
1
An Agent-based Macroeconomic Model with Endogenous Money
2
Simulations
3
Conclusion
Pascal Seppecher (CEMAFI)
Agent-based Computational Economics
December 10, 2009
15 / 16
Conclusion
Conclusion If the bank does not measure the risks and offers endlessly new credits that are not be repaid, then the rules of the monetary sphere are deeply affected : Monetary destruction is no longer assured but by the creation of more money. This new currency has no counterpart in the real sphere and results in the formation of a bubble of bad loans. Increasing risk in the banking system, beyond what its own funds permits reflects a growing disjunction between real and monetary spheres. The new money fuels profits inflation, which supports demand and activity, thus giving the illusion of a healthy economy. However, far from reflecting a greater effectiveness of the economy, this increase of the profit share is (with the decline in real wages) the most acute signal of deep disruption in the system.
Pascal Seppecher (CEMAFI)
Agent-based Computational Economics
December 10, 2009
16 / 16
