Abstract
Existing models of financial instability tend to be based on top-down, partial-equilibrium views of markets and their interactions; they are unable to incorporate the complexity of behavior among heterogeneous firms or the tendency for all types of firms to change their behavior during a crisis. This paper argues that agent-based models (ABMs) — which seek to explain how the behavior of individual firms or “agents” can affect outcomes in complex systems — can make an important contribution to our understanding of potential vulnerabilities and paths through which risks can propagate across the financial system.
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