Abstract
This research studies how excessive liquidity can trigger catastrophic economic crises in a stylized macroeconomic agent-based model (ABM). Previous studies showed the relevance of the income distribution to the economic crises, whereas we find, in a well-studied macroeconomic ABM endowed with diverse economic performance of firms, while providing moderate liquidity serves as an effective tool to stabilize the economy, excessive liquidity may cause abnormal dispersion of firm’s wealth and the subsequent severe endogenous crises. The mechanism for such large-scale crises is found in the model as the increasing gap of financial fagility between the advantageous and disadvantageous groups of firms. Two factors, diverse production cycles and variable wages, are used to explore the robustness of the occurrence of crises. Moreover, our study shows that the leverage ratio based on aggregate values may underestimate the systemic risk. Hence, a proposal for the new design of the risk measurement in the macro-economy and insights into monetary policies for a sustainable economic development is given.
Highlights
Thanks to the tremendous progresses in science and technology, we have witnessed a trend of worldwide economic growth with expanding population and capitalization in the past decades
The outline of this paper is as follows: Section 2 provides an overview of theoretical background of some related models for macroeconomy; Section 3 gives a brief introduction to the assumptions, features and results of Mark0; In Section 4, we demonstrate our modification of the integration of firm heterogeneity into Mark0 and show the results; In Section 5, we discuss the robustness of results with some model extensions of diverse production cycles and variable wages; In Section 6, we draw some implications on the measurement of risk of the severe economic crisis
There exist nine parameters in Mark0, it is found that the status of the model economy is controlled by only two parameters, the liquidity parameter θ and hiring/firing propensity R = η+/η− which measures the ratio of amplitude of hiring and firing labor force
Summary
Thanks to the tremendous progresses in science and technology, we have witnessed a trend of worldwide economic growth with expanding population and capitalization in the past decades. We design a new model called HoP-Mark0, where the heterogeneity of firms’ performance is ingegrated into Mark0, and find in HoP-Mark0 that a new type of catastrophic endogenous crisis featuring enhanced bankruptcy and unemployment emerges if too much liquidity is given. The origin of this interesting phenomenon is examined thoroughly from the statistics of leverages of individual firms.
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