Domenico Delli Gatti

Investment confidence, corporate debt and income fluctuations☆

In this paper we present a macroeconomic model with New Keynesian features which endogenously generates dynamic paths of income and the stock of corporate debt of a cyclic and chaotic nature. From the market clearing condition on goods and money markets we derive the dynamic paths of income and corporate debt whose stability properties depend upon the propensity to invest out of the flow of internally generated funds, which in turn is a positive function of income. If it is relatively ‘low’, the dynamic paths on income and corporate debt converge to their steady-state long-run values. When the propensity to invest is neither too ‘low’ nor too ‘high’, the system can exhibit either bounded cycles or chaotic dynamics. Finally, if it exceeds a critical upper value, an explosive growth of debt occurs and a financial crisis is likely to ensue.

A look at the relationship between industrial dynamics and aggregate fluctuations

Starting with the pioneering work of [23], the study of the determinants and the shape of the steady-state distribution of firms’ size has long fascinated economists. While the conventional view received from the seminal work of e.g. [29], [27] and [42] holds that the firms’ size distribution is significantly right-skewed and approximately log-normal, recent empirical research has lent support to the view suggested by H. Simon and his co-author ([32]), according to whom a Pareto-Levy (or power law) distribution seems to return a better fit to the data for the whole distribution ([3]), or at least for its upper tail (Ramsden and Kiss-Haypal, 2000; [18]).

FINANCIAL FRAGILITY, INDUSTRIAL DYNAMICS, AND BUSINESS FLUCTUATIONS IN AN AGENT-BASED MODEL

In this paper, we model an agent-based economy in which heterogeneous agents (firms and a bank) interact in the financial markets. The heterogeneity is due to the balance sheet conditions and to size. In our simulations, at the aggregate level, output displays changes in trend and volatility giving rise to complex dynamics. The average solvency and liquidity ratios peak during recessions as empirical analysis shows. At the firm level the model generates: i) firm sizes left-skewed distributed, ii) growth rates Laplace distributed. Furthermore, small idiosyncratic shocks can generate large aggregate fluctuations.

Reflections on modern macroeconomics: Can we travel along a safer road?☆

In this paper we sketch some reflections on the pitfalls and inconsistencies of the research program—currently dominant among the profession—aimed at providing microfoundations to macroeconomics along a Walrasian perspective. We argue that such a methodological approach constitutes an unsatisfactory answer to a well-posed research question, and that alternative promising routes have been long mapped out but only recently explored. In particular, we discuss a recent agent-based, truly non-Walrasian macroeconomic model, and we use it to envisage new challenges for future research.

Global dynamics in a non-linear model of the equity ratio

A model for firms’ financial conditions is proposed, which ultimately reduces to a two-dimensional non-invertible map in the variables mean and variance of the equity ratio. The possible dynamics of the model and the global behaviour are investigated. We describe the mechanism of bifurcations leading to fractalization of the basins and/or fractalization of their boundaries, showing how a locally stable attractor may be almost globally unstable. Multistability is also investigated. Two, three or four co-existing attractors have been found and we describe the mechanism of bifurcations leading their basins to become chaotically intermingled, and thus to unpredictability of the asymptotic state in a wide region. The knowledge of such regimes, besides those associated with simple dynamics, may be of help for the operators. While the use of the technical tools we propose to study the global dynamics and bifurcations may be of help for further investigations. ” 2000 Elsevier Science Ltd. All rights reserved. In this paper we present a model of fluctuating growth in which firms’ financial conditions play a crucial role. Our analysis starts from the distribution of firms according to their equity ratio, that is the ratio of the equity base or net worth to the capital stock, a proxy of financial robustness. We identify two dynamic laws for the mean and the variance of this distribution. The motion over time of the average equity ratio is the engine of growth and fluctuations. The dynamic pattern of the dispersion of the distribution, captured by the variance, however, interacts with evolution of the average equity ratio. Given the non-linear nature of the map which describes the laws of motion of the mean and the variance of the equity ratio, a wide range of dynamic patterns are possible. Fixed points or periodic orbits, attracting closed invariant curves and thin annular chaotic areas wide chaotic areas or explosions may occur. For quite plausible values of the parameters which characterize the map, the dynamics of the equity ratio can be regular or chaotic, and the motion of capital and output can be characterized as a process of fluctuating growth, although, as we shall see, often very sensitive to small perturbations. The goal of the present paper is to show how the global properties (deriving from the structure of the basins, their boundaries and the critical curves of non-invertible two-dimensional maps) may be used to understand the dynamic behaviour of the model, especially when analytical results are not accessible, as in our case, where not only the equilibrium values, but also the number of existing fixed points, cannot be explicitly known.

Sectoral Imbalances and Long-run Crises

There has been a widespread presumption that the current economic crisis is a financial crisis, caused by the bursting of a credit bubble. Unjustified optimism about asset prices and associated risks (primarily in housing but also in financial industry equities and even in equities generally), accommodated by lax regulation, careless private lending and loose monetary policies, led to unsustainable levels of household and financial sector leverage. The inevitable collapse of the underlying asset prices then caused widespread bankruptcies, foreclosures, and impaired balance sheets among households, firms, and financial institutions. Combined with consequent large increases in the incremental risks of lending and investing, these balance sheet effects induced large declines in household spending, firm output and investment, and bank lending.1

Agents’ Heterogeneity, Aggregation, and Economic Fluctuations

We study the implications of agents’ heterogeneity for business cycle analysis with the help of a two dimensional non-linear dynamical system derived from a New Keynesian macroeconomic model with imperfect capital markets. In order to analyze the interaction between real and financial variables, we have focussed on the degree of financial fragility of the economy, as proxied by the ratio of corporate net worth to the stock of capital, that is the equity ratio. Our approach allows to analyze both fluctuations due to the impulse-propagation mechanism and self-sustaining endogenous cycles. In the former case, shocks transmitted and amplified by a propagation mechanism, which depends on the degree of agents’ heterogeneity. In the latter case self sustained business cycles are generated by the evolution over time of the distribution of heterogeneous agents, classified by the degree of financial fragility.

Nonlinear Dynamics and European GNP Data

The aim of this paper is to assess whether the data-generation process of the GDP can be interpreted by means of a nonlinear model instead of a linear one. We model the first differences of logarithmic real GDP data with constant parameters for those European countries (France, Germany, Italy, U.K., Denmark, Sweden, and Norway) which have long-term time series. Since the linear autoregressive model is rejected, an alternative nonlinear model has been specified: it turns out that the annual European GDPs can adequately be described by means of a nonlinear model with constant parameters.

Financial instability revisited: aggregate fluctuations due to changing financial conditions of heterogeneous firms

Hyman Minsky is renowned for his theoretical and empirical investigation of the capitalist economy. In this book, a distinguished group of contributors provides an authoritative account of his contribution to the analysis of capitalism and, more particularly, to the fields of monetary and post Keynesian economics.

SCALING LAWS IN THE MACROECONOMY

The practice of detecting power laws and scaling behaviors in economics and finance has gained momentum in the last few years, due to the increased use of concepts and methods first developed in statistical physics. Some disappointment has emerged in the economic profession, however, as regards the models proposed so far to theoretically explain these phenomena. In this paper we aim to address this criticism, showing that scaling behaviors can naturally emerge in a multiagent system with optimizing interacting units characterized by financial fragility.