The financial instability hypothesis: A stochastic microfoundation framework

Chiarella, C; Di Guilmi, C

The financial instability hypothesis: A stochastic microfoundation framework

Chiarella, C Di Guilmi, C

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Publication Type:: Journal Article
Citation:: Journal of Economic Dynamics and Control, 2011, 35 (8), pp. 1151 - 1171
Issue Date:: 2011-08-01

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Field	Value	Language
dc.contributor.author	Chiarella, C	en_US
dc.contributor.author	Di Guilmi, C https://orcid.org/0000-0001-7786-039X	en_US
dc.date.issued	2011-08-01	en_US
dc.identifier.citation	Journal of Economic Dynamics and Control, 2011, 35 (8), pp. 1151 - 1171	en_US
dc.identifier.issn	0165-1889	en_US
dc.identifier.uri	http://hdl.handle.net/10453/14535
dc.description.abstract	This paper examines the dynamics of financial distress and in particular the mechanism of transmission of shocks from the financial sector to the real economy. The analysis is performed by representing the linkages between microeconomic financial variables and the aggregate performance of the economy by means of a microfounded model with firms that have heterogeneous capital structures. The model is solved both numerically and analytically, by means of a stochastic approximation that is able to replicate quite well the numerical solution. These methodologies, by overcoming the restrictions imposed by the traditional microfounded approach, enable us to provide some insights into the stabilization policies which may be effective in a financially fragile system. © 2011 Elsevier B.V.	en_US
dc.relation.ispartof	Journal of Economic Dynamics and Control	en_US
dc.relation.isbasedon	10.1016/j.jedc.2011.02.005	en_US
dc.subject.classification	Economics	en_US
dc.title	The financial instability hypothesis: A stochastic microfoundation framework	en_US
dc.type	Journal Article
utslib.citation.volume	8	en_US
utslib.citation.volume	35	en_US
utslib.for	010205 Financial Mathematics	en_US
utslib.for	1401 Economic Theory	en_US
utslib.for	1402 Applied Economics	en_US
utslib.for	1502 Banking, Finance and Investment	en_US
pubs.embargo.period	Not known	en_US
pubs.organisational-group	/University of Technology Sydney
pubs.organisational-group	/University of Technology Sydney/Faculty of Business
pubs.organisational-group	/University of Technology Sydney/Faculty of Business/Economics Discipline
utslib.copyright.status	closed_access
pubs.issue	8	en_US
pubs.publication-status	Published	en_US
pubs.volume	35	en_US

Abstract:

This paper examines the dynamics of financial distress and in particular the mechanism of transmission of shocks from the financial sector to the real economy. The analysis is performed by representing the linkages between microeconomic financial variables and the aggregate performance of the economy by means of a microfounded model with firms that have heterogeneous capital structures. The model is solved both numerically and analytically, by means of a stochastic approximation that is able to replicate quite well the numerical solution. These methodologies, by overcoming the restrictions imposed by the traditional microfounded approach, enable us to provide some insights into the stabilization policies which may be effective in a financially fragile system. © 2011 Elsevier B.V.

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http://hdl.handle.net/10453/14535