Financial fragility and global dynamics

Dieci, Roberto; Sordi, Serena; Vercelli, Alessandro

doi:10.1016/j.chaos.2005.08.092

Cited by 9 publications

(2 citation statements)

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“…The proximate starting point of the analysis is the model recently suggested by one of the authors to update and extend the core of the FIH (Vercelli, 2009a,b; see also Vercelli, 2000and Dieci, Sordi and Vercelli, 2006) from which we draw the underlying vision of the interaction between liquidity and solvency conditions, as well as a classification of the financial structures of the units that we believe to be more general than that of Minsky and more suitable to formal analysis.…”

Section: Introductionmentioning

confidence: 99%

Heterogeneous expectations and strong uncertainty in a Minskyian model of financial fluctuations

Sordi

Vercelli

2012

Journal of Economic Behavior & Organization

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We examine the role of expectations in a model aimed to explain financial fluctuations. The\ud model restates the core of Minsky’s financial instability hypothesis, focusing on the role of\ud expectations. The hypotheses concerning the process of formation and revision of expectations\ud are discussed in light of Keynes’s epistemological view of the behavior of boundedly\ud rational agents under conditions of strong uncertainty. These hypotheses are formalized\ud by drawing on recent advances in complex dynamics, decision theory and behavioral economics.\ud We show that widespread use of extrapolative expectations by economic agents\ud produces a high degree of financial instability that may lead to a serious financial crisis,\ud and that the use by economic agents of a mix of extrapolative and regressive expectations\ud reduces the dynamical instability of the model but may give rise to complex dynamics

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Section: Introductionmentioning

confidence: 99%

Heterogeneous expectations and strong uncertainty in a Minskyian model of financial fluctuations

Sordi

Vercelli

2012

Journal of Economic Behavior & Organization

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“…This is the finding of Grandmont (1985) that for a range of standard models within the plausible parameter range, few would be both stable and unique as required for flexible exchange rates to be justifiable as an equilibrating mechanism. Subsequent investigations reinforce these concerns that the equilibrium concept is of doubtful value (de Arcangelis and Gandolfo, 1997; Barnett and He, 1999;Chichilnisky, 1999;Hahn, 1999;Phelps, 1999;Drèze and Herings, 2003;Sordi and Vercelli, 2003;Dieci et al, 2006).…”

Section: Experimental Application Of Skat To Exchange Rate Regimesmentioning

confidence: 96%

Beggar‐Thy‐Neighbour Exchange Rate Regime Misadvice from Misapplications of Mundell (1961) and the Remedy

Pope

2009

World Economy

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Economists invoke Mundell (1961) in arguing for the general policy of a flexible exchange rate regime as a means of restoring equilibria after shocks. But there is a discrepancy between the intent of the general policy and attempts at its implementation as identified by specific changes in exchange rates. When we assemble the set of specific changes called for by distinct economists operating as advocates for individual countries, these are uniformly in the form of beggar‐thy‐neighbour advice – i.e. travesties of objectively identifying disequilibria and a menace to international cooperation and peace. This paper traces the unintended travesties to problems of complexity and uncertainty, problems that implicitly are assumed absent in Mundell (1961) rendering the situation so simple that equilibria are transparent. The problems remained essentially unaddressed when economists extended Mundell (1961) via expected utility theory since this theory also ignores the impossibility of maximising and the complexities of central bankers, private firms and others in doing the evaluation stage in reaching decisions. The problems can be overcome by modelling within SKAT, the Stages of Knowledge Ahead Theory. This paper points to experimental evidence in support of the view that under all sorts of disequilibrating shocks, currency unions outperform flexible currencies by eliminating the inefficiencies generated by exchange rate uncertainty.

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