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(Ir)rational explorers in the financial jungle: modelling Minsky with heterogeneous agents

Author

Listed:
  • Alessia Cafferata
  • Marwil J. Dávila-Fernández
  • Serena Sordi
Abstract
Over the past decades, several scholars have formalised Minsky's profound insight that increasing fiancial fragility accompanies periods of economic stability. It must be noted, however, that a deep assessment of the role of expectations formation with heterogeneous agents has been provided only by those contributions focusing on stock-market price dynamics. Macroeconomic models dealing with debt dynamics, on the other hand, have not yet presented such an account. It is our purpose to fil this gap in the literature by formalising switches between different heuristics in a model where solvency aspects matter. Our system is capable of generating time-series that reproduce important empirical stylised facts such as fat-tails and asymmetric skewness. In the absence of a stochastic component, the model still leads to sensitivity to initial conditions. Moreover, while the destabilising role of extrapolative behaviour is part of conventional wisdom, we show under which conditions fundamentalists, the existence of resource constraints, and the time horizon of the economic unit may also lead to instability.

Suggested Citation

  • Alessia Cafferata & Marwil J. Dávila-Fernández & Serena Sordi, 2020. "(Ir)rational explorers in the financial jungle: modelling Minsky with heterogeneous agents," Department of Economics University of Siena 819, Department of Economics, University of Siena.
    • Handle: RePEc:usi:wpaper:819
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    References listed on IDEAS

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    More about this item

    Keywords

    Financial instability; real-financial interactions; heterogeneous expec-tations; complex dynamics; Minsky;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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