Financial Stability

Does Financialization Contribute to Growing Income Inequality?

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The financialization of the US economy and rising income inequalities are two of the most profound economic developments of the last fifty years. In this project we ask if the financialization of the US economy has contributed to rising income inequality.  We propose to answer this question with complementary analyses at the individual, firm and industry levels.  We focus on three components of the earnings distribution: employment earnings distributions, executive compensation, and capital/labor shares of value added. For firms we also examine the consequences of financialization for global and domestic employment and for domestic employment separately for various occupational groups.

Rising Inequality as a Structural Cause of the Financial and Economic Crisis

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The financial crisis that began in summer 2007 has turned into the worst economic crisis since the Great Depression. Its causes are usually sought in the malfunctioning of the financial sector. Non-financial factors often receive less attention. One of the major socio-economic changes of recent decades has been a dramatic shift in income distribution. The project investigates whether rising inequality has contributed to the macroeconomic imbalances that erupted in the present crisis. This is done based on a Kaleckian macroeconomic model. This project suggests that the present crisis should be understood as an outcome of the interaction of the process of financial deregulation with the effects of the polarization of income distribution. Read more

A Theory of Financial Market Instability Even Under Perfect Conditions: Bubbles and Crashes in Rational Belief Equilibrium

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This project seeks to develop a theory of how bubbles and crashes can arise even when all agents are rational, informed, and trading in perfect markets. This would establish bubbles and crashes as inherent features of economic systems, providing a rigorous counterargument to "market fundamentalism," i.e., the idea that such instabilities only result from market failure and shall be resolved by moving ever closer towards the ideal market. To achieve this goal, the project will integrate tools and concepts from what is sometimes called "econophysics" in a general equilibrium framework under rational beliefs.

New-Style Central Banking

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Following financial crises, the central banks of advanced countries issue trillions of dollars of reserves, pay interest on those reserves, and hold a portfolio of risky assets including some government bonds with default risk. This project will investigate the impact of this new style of central banking on the bank's solvency, its ability to control inflation, and on economic stability. It suggests new rules for the architecture of central banks, provides quantitative estimates of the financial strength of the main central banks and of how large are their resources, and investigates whether the central bank can prevent or induce self-fulfilling sovereign debt crises.

Computational Platforms for Agent-Based Financial Models

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This project will construct a broad set of software tools designed to better facilitate the understanding and comparative features of various types of agent-based finical markets.  These tools should form a computational foundation for researchers interested in getting started in the field and for those interested in teaching courses based on agent-based principles.  They should also form a comparative theoretical test bed to better understand what the critical theoretical features are and how they impact our broader understanding of actual market dynamics.

Modelling Minksy's Financial Instability Hypothesis - A Dynamical Systems Approach

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This project aims to improve the mathematical capabilities of non-Neoclassical economics. The project will use modern techniques from nonlinear dynamical system to model the expansion and contraction of credit and its effect on real economic output and asset prices. In this framework, instability and financial crises arise endogenously, rather than through inexplicable external shocks to an inherently stable system. Consequently, the stabilizing effects of policy intervention can also be analyzed in a dynamically consistent setting, instead of being ad hoc measures designed to address isolated phenomena.

Countervailing Monetary Power: Emerging Markets and the Re-Regulation of Cross-Border Finance

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This project will examine the economic theory, policy, and international political economy of cross border finance in the run up to and in the wake of the global financial crisis. A theory of "countervailing monetary power" will be developed that fuses economic theory in the tradition of Walras, Pigou, Minsky, Hirschman, Galbraith, Stiglitz, and Korinek, with theories of international political economy derived from Kindleberger, Cohen, Andrews, Helleiner, Abdelal, Frieden, and Chwieroth.

Macroeconomic Instability and Microeconomic Financial Fragility: A Stock-Flow Consistent Approach with Heterogeneous Agents

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The project introduces heterogeneous microeconomic behavior into a demand-driven stock flow consistent model to study the links between microeconomic financial fragility and macroeconomic instability. The innovative aggregation method for heterogeneous agents is able to endogenously derive the macro-equations and the dynamics of flows from the microeconomic behavioral rules. The solution presents the analytical links between the financial micro-variables and the macroeconomy, in order to study the joint dynamics of leverage, income distribution, and aggregate production during the business cycle. The study of the macroeconomic dynamics as a consequence of idiosyncratic micro-shocks offers an alternative perspective for economic policy.

Reflexivity and the Theory of Economic Agents

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This project will build on and review the state of knowledge regarding reflexivity in economics, philosophy, and the social sciences, lay out George Soros’s development of the concept in connection with the analysis of the economy and financial markets, develop an identity analysis-based general theory of agents and individuals as evolutionary-reflexive using past research, critique mainstream equilibrium-rational expectations reflexivity Lucas reasoning, and apply this approach to heterogeneous agent-based modeling in economics and other complexity explanations of the economy.

Finance Without Crises

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The goal of this research project is to describe the long-term dynamics of incomes in a financialized developed economy from both an empirical and theoretical perspective. Specifically, it will examine the interaction between big corporations/banks, small firms, and households, thereby aiming to define a stylized economic paradigm, characterized by a broad access to credit on one side and an oligopolistic control of the financial flows on the other. The first stage will consist of an empirical study of US data on the composition of spending and on the indebtedness behavior of households along the income distribution ladder as well as distribution of their net worth. Read more