Financial destabilization. (English) Zbl 1505.91369
Summary: This paper uses a dynamic general equilibrium model to examine whether financial innovations destabilize an economy in which a representative firm operates one production sector with a neoclassical production function. Entrepreneurs receive individual-specific productivity shocks in each period. Entrepreneurs who draw higher productivity shocks become capital producers and borrow production resources in the financial market, whereas entrepreneurs who draw lower productivity shocks become lenders. Capital producers face financial frictions and can borrow only up to a certain proportion of their funds. Under an empirically plausible elasticity of substitution between capital and labor, as financial frictions are mitigated, the economy loses stability, and a flip bifurcation occurs at a certain level of financial frictions. In some cases, a cycle with more than two periods and complex dynamics arise as period-doubling bifurcations repeatedly occur. In any case, the amplitude of fluctuations increases as financial frictions faced by capital producers are mitigated and is maximized when they are eliminated. These outcomes imply that financial innovations are likely to destabilize an economy.
MSC:
| 91G15 | Financial markets |
| 91B38 | Production theory, theory of the firm |
| 91B50 | General equilibrium theory |
| 91B69 | Heterogeneous agent models |
Keywords:
financial innovations; endogenous business cycles; financial destabilization; heterogeneous agentsReferences:
| [1] | Aghion, P.; Bacchetta, P.; Banerjee, A., Financial development and the instability of open economies, J. Monetary Econ., 51, 6, 1077-1106 (2004) |
| [2] | Aghion, P.; Banerjee, A., Volatility and Growth (2005), Oxford University Press: Oxford University Press New York |
| [3] | Aghion, P.; Banerjee, A.; Piketty, T., Dualism and macroeconomic volatility, Q. J. Econ., 114, 4, 1359-1397 (1999) · Zbl 0940.91055 |
| [4] | Aghion, P.; Howitt, P.; Mayer-Foulkes, D., The effect of financial development on convergence: Theory and evidence, Q. J. Econ., 120, 1, 173-222 (2005) |
| [5] | Airaudo, M., Complex stock price dynamics under Max Weber’s spirit of capitalism hypothesis, Econom. Theory, 64, 1, 47-73 (2017) · Zbl 1404.91112 |
| [6] | Antras, P.; Caballero, R. J., Trade and capital flows: A financial frictions perspective, J. Polit. Econ., 117, 4, 701-744 (2009) |
| [7] | Asano, T.; Yokoo, M., Chaotic dynamics of a piecewise linear model of credit cycles, J. Math. Econom., 80, 9-21 (2019) · Zbl 1419.91485 |
| [8] | Azariadis, C.; Smith, B. D., Private information, money, and growth: Indeterminacy, fluctuations, and the Mundell-Tobin effect, J. Econ. Growth, 1, 3, 309-332 (1996) · Zbl 1011.91505 |
| [9] | Azariadis, C.; Smith, B. D., Financial intermediation and regime switching in business cycles, Amer. Econ. Rev., 88, 3, 516-536 (1998) |
| [10] | Beaudry, P., Galizia, D., Portier, F., 2015. Reviving the Limit Cycle View of Macroeconomic Fluctuations. NBER Working Paper 21241. |
| [11] | Beaudry, P.; Galizia, D.; Portier, F., Is the macroeconomy locally unstable and why should we care?, (Eichenbaum, M.; Parker, J. A., NBER Macroeconomics Annual, Vol. 31 (2017), University of Chicago Press: University of Chicago Press Chicago), 479-530 |
| [12] | Beaudry, P.; Galizia, D.; Portier, F., Putting the cycle back into business cycle analysis, Amer. Econ. Rev., 110, 1, 1-47 (2020) |
| [13] | Benhabib, J.; Day, R. H., A characteristic of erratic dynamics in the overlapping generations model, J. Econom. Dynam. Control, 4, 37-55 (1982) |
| [14] | Benhabib, J.; Laroque, G., On competitive cycles in productive economies, J. Econom. Theory, 45, 1, 145-170 (1988) · Zbl 0657.90024 |
| [15] | Benhabib, J.; Nishimura, K., Competitive equilibrium cycles, J. Econom. Theory, 35, 2, 284-306 (1985) · Zbl 0583.90012 |
| [16] | Bertocchi, G.; Wang, Y., The real value of money under endogenous beliefs, J. Econom. Theory, 67, 1, 205-222 (1995) · Zbl 0840.90031 |
| [17] | Boissay, F.; Collard, F.; Smets, F., Booms and banking crises, J. Polit. Econ., 124, 2, 489-538 (2016) |
| [18] | Boldrin, M.; Deneckere, R. J., Sources of complex dynamics in two-sector growth models, J. Econom. Dynam. Control, 14, 3-4, 627-653 (1990) · Zbl 0722.90016 |
| [19] | Chirinko, R. S., \( \sigma \): The long and short of it, J. Macroecon., 30, 2, 671-686 (2008) |
| [20] | del Río, F.; Lores, F.-X., The decline in capital efficiency and labour share, Economica, 86, 344, 635-662 (2019) |
| [21] | Deng, L.; Fujio, M.; Khan, M. A., Eventual periodicity in the two-sector RSL model: Equilibrium vis-á-vis optimum growth, Econom. Theory, 72, 2, 615-639 (2021) · Zbl 1479.91231 |
| [22] | Farmer, R. E.A., Deficits and cycles, J. Econom. Theory, 40, 1, 77-88 (1986) · Zbl 0606.90025 |
| [23] | Favara, G., Agency problems and endogenous investment fluctuations, Rev. Financ. Stud., 25, 7, 2301-2342 (2012) |
| [24] | Gechert, S.; Havranek, T.; Irsova, Z.; Kolcunova, D., Measuring capital-labor substitution: The importance of method choices and publication bias, Rev. Econ. Dyn., 45, 55-82 (2022) |
| [25] | Gokan, Y., Poverty traps, the money growth rule, and the stage of financial development, J. Econom. Dynam. Control, 35, 8, 1273-1287 (2011) · Zbl 1217.91125 |
| [26] | Grandmont, J.-M., On endogenous competitive cycles, Econometrica, 53, 5, 995-1046 (1985) · Zbl 0593.90009 |
| [27] | Grandmont, J.-M.; Pintus, P.; de Vilder, R., Capital-labor substitution and competitive nonlinear endogenous business cycles, J. Econom. Theory, 80, 1, 14-59 (1998) · Zbl 0911.90059 |
| [28] | Guillaumont Jeanneney, S.; Kpodar, K., Financial development and poverty reduction: Can there be a benefit without a cost?, J. Dev. Stud., 47, 1, 143-163 (2011) |
| [29] | Guiso, L.; Haliassos, M.; Jappelli, T., Household stockholding in Europe: Where do we stand and where do we go?, Econ. Policy, 18, 36, 123-170 (2003) |
| [30] | Kikuchi, T., International asset market, nonconvergence, and endogenous fluctuations, J. Econom. Theory, 139, 1, 310-334 (2008) · Zbl 1133.91369 |
| [31] | Kikuchi, T.; Stachurski, J., Endogenous inequality and fluctuations in a two-country model, J. Econom. Theory, 144, 4, 1560-1571 (2009) · Zbl 1175.91115 |
| [32] | King, M. A.; Leape, J. I., Wealth and portfolio composition: Theory and evidence, J. Public Econ., 69, 2, 155-193 (1998) |
| [33] | Klump, R.; McAdam, P.; Willman, A., Factor substitution and factor-augmenting technical progress in the United States: A normalized supply-side system approach, Rev. Econ. Stat., 89, 1, 183-192 (2007) |
| [34] | Klump, R.; McAdam, P.; Willman, A., The normalized CES production function: Theory and empirics, J. Econ. Surv., 26, 5, 769-799 (2012) |
| [35] | Kunieda, T.; Shibata, A., Asset bubbles, economic growth, and a self-fulfilling financial crisis, J. Monetary Econ., 82, 70-84 (2016) |
| [36] | Kunieda, T.; Shibata, A., Entrepreneurs, financiers, and boom-bust cycles, Macroecon. Dyn., 21, 3, 785-816 (2017) |
| [37] | Lazaryan, N.; Lubik, T. A., Global dynamics in a search and matching model of the labor market, Econom. Theory, 68, 2, 461-497 (2019) · Zbl 1422.91433 |
| [38] | León-Ledesma, M. A.; McAdam, P.; Willman, A., Identifying the elasticity of substitution with biased technical change, Amer. Econ. Rev., 100, 4, 1330-1357 (2010) |
| [39] | Loayza, N. V.; Ranciere, R., Financial development, financial fragility, and growth, J. Money Credit Bank., 38, 4, 1051-1076 (2006) |
| [40] | Lucas, R. E., Asset prices in an exchange economy, Econometrica, 46, 6, 1429-1445 (1978) · Zbl 0398.90016 |
| [41] | Matsuyama, K., Credit traps and credit cycles, Amer. Econ. Rev., 97, 1, 503-516 (2007) |
| [42] | Matsuyama, K., The good, the bad, and the ugly: An inquiry into the causes and nature of credit cycles, Theor. Econ., 8, 3, 623-651 (2013) · Zbl 1395.91324 |
| [43] | Matsuyama, K.; Sushko, I.; Gardini, L., Revisiting the model of credit cycles with good and bad projects, J. Econom. Theory, 163, 525-556 (2016) · Zbl 1369.91129 |
| [44] | Myerson, R. B., A model of moral-hazard credit cycles, J. Polit. Econ., 120, 5, 847-878 (2012) |
| [45] | Myerson, R. B., Moral-hazard credit cycles with risk-averse agents, J. Econom. Theory, 153, 74-102 (2014) · Zbl 1309.91097 |
| [46] | Nishimura, K.; Yano, M., Nonlinear dynamics and chaos in optimal growth: An example, Econometrica, 63, 4, 981-1001 (1995) · Zbl 0840.90037 |
| [47] | Orgiazzi, E., Financial development and instability: The role of the labour share, Res. Econ., 62, 4, 215-236 (2008) |
| [48] | Pintus, P. A., International capital flows, debt overhang and volatility, Int. J. Econ. Theory, 7, 4, 301-315 (2011) |
| [49] | Reichlin, P., Equilibrium cycles in an overlapping generations economy with production, J. Econom. Theory, 40, 1, 89-102 (1986) · Zbl 0658.90023 |
| [50] | Rochon, C.; Polemarchakis, H. M., Debt, liquidity and dynamics, Econom. Theory, 27, 1, 179-211 (2006) · Zbl 1123.91040 |
| [51] | Rubio, M.; Carrasco-Gallego, J. A., Macroprudential and monetary policies: Implications for financial stability and welfare, J. Bank. Financ., 49, 326-336 (2014) |
| [52] | Sorger, G., Cycles and chaos in the one-sector growth model with elastic labor supply, Econom. Theory, 65, 1, 55-77 (2018) · Zbl 1398.91433 |
| [53] | Woodford, M., Finance, instability and cycles, (Semmler, W., Financial Dynamics and Business Cycles: New Perspectives (1989), M.E. Sharpe, Armonk, N.Y.), 18-37 |
| [54] | Yokoo, M., Chaotic dynamics in a two-dimensional overlapping generations model, J. Econom. Dynam. Control, 24, 5-7, 909-934 (2000) · Zbl 1136.91528 |
This reference list is based on information provided by the publisher or from digital mathematics libraries. Its items are heuristically matched to zbMATH identifiers and may contain data conversion errors. In some cases that data have been complemented/enhanced by data from zbMATH Open. This attempts to reflect the references listed in the original paper as accurately as possible without claiming completeness or a perfect matching.
