[Show abstract][Hide abstract] ABSTRACT: As recent experience suggests, the most significant economic fluctuations are those that combine real and financial factors. This paper works out a simple model that couples a version of Goodwin's (1967) growth cycle model of real fluctuations with insights drawn from a model of financial fluctuations based on Minsky's financial instability hypothesis (Vercelli, 2000, Sordi and Vercelli, 2006 and Sordi and Vercelli, 2012). The suggested model substantially modifies the model by Keen (1995) who combined insights from Goodwin and Minsky within a model of fluctuating growth. In the real part of the model we introduce the possibility of disequilibrium in the goods market and model a mechanism of adjustment of output based on the conventional dynamic multiplier. The model so obtained may exhibit persistent dynamics that may provide insights to enable a better understanding of the nature of real-world fluctuations.
Journal of Economic Dynamics and Control 11/2014; 48(11):325-348. DOI:10.1016/j.jedc.2014.09.030 · 0.86 Impact Factor
[Show abstract][Hide abstract] ABSTRACT: This paper argues that there is a secular tendency toward financialization that is intrinsic in the development of market relations. The driving force of this evolutionary process is rooted in a fairly continuous flow of financial innovations meant to remove the existing constraints to the flexibility of economic transactions. For example, according to received wisdom, the adoption of money as a medium of exchange has removed the strictures of the double coincidence of wants, while the modern forms of credit have been developed to relax the cash-in-advance constraint on economic transactions. As these examples suggest, financial innovations aim to extend the set of exchange options in time, space, and contents for the decision makers who introduce them. Financial innovations are adopted because, ceteris paribus, a larger option set is positively correlated with higher expected returns and pay-off opportunities. Their systemic effects, however, may have negative implications such as financial instability, underinvestment in the real sector, unemployment, and stagnation. When the negative consequences accumulate beyond a tolerable threshold, the remedy has to be sought in stricter rules of self-regulation, or rather of regulation by law, or even in severe measures of financial repression. The fact that this has not happened since the recent deep crisis has further enhanced the unsustainability of the current process of financialization.
International Journal of Political Economy 01/2013; 42(4):19-46. DOI:10.2753/IJP0891-1916420402
[Show abstract][Hide abstract] ABSTRACT: This article explores the Marxian roots of the multiplier in order to clarify its foundations and validity conditions. The authors argue that from Marx's analysis of the evolution of institutions and technology of exchange crucial insights may be derived. In the light of this analysis Kalecki reformulated Marx's reproduction schemes as an instrument to understand and control the dynamics of a capitalist economy. Though the focus is restricted to the first two volumes of Capital and Kalecki's early contributions, we can draw from these works valuable understanding into the theoretical and empirical scope of the Kahn-Keynes multiplier and its implications for contemporary macroeconomic problems.
History of Economic Ideas 12/2012; 20(2):137-155. DOI:10.2139/ssrn.1715550 · 0.19 Impact Factor
[Show abstract][Hide abstract] ABSTRACT: This paper assumes that financial fluctuations are the result of the dynamic interaction between liquidity and solvency conditions of individual economic units. The framework is an extention of Sordi and Vercelli (2012) designed as an heterogeneous agent model which proceeds through discrete time steps within a finite time horizon. The interaction at the micro-level between economic units monitors the spread of contagion and systemic risk, producing interesting complex dynamics. The model is analysed by means of numerical simulations and systemic risk modelling, where local interaction of units is captured and analysed by the bilateral provision of liquidity among units. The behaviour and evolution of economic units are studied for different parameter regimes in order to investigate the relation between units’ expectations, liquidity regimes and contagion. Liquidity policy implications are briefly discussed.
[Show abstract][Hide abstract] ABSTRACT: We examine the role of expectations in a model aimed to explain financial fluctuations. The model restates the core of Minsky’s financial instability hypothesis, focusing on the role of expectations. The hypotheses concerning the process of formation and revision of expectations are discussed in light of Keynes’s epistemological view of the behaviour of boundedly rational agents under conditions of strong uncertainty. These hypotheses are formalized by drawing on recent advances in complex dynamics, decision theory and behavioural economics. We show that widespread use of extrapolative expectations by economic agents produces a high degree of financial instability that may lead to a serious financial crisis, and that the use by economic agents of a mix of extrapolative and regressive expectations reduces the dynamical instability of the model but may give rise to complex dynamics.
[Show abstract][Hide abstract] ABSTRACT: This paper aims to bridge the gap between theory and facts on the so-called 'Minsky moments' by revisiting the financial instability hypothesis (FIH). We limit the analysis to the core of the FIH, that is, to its strictly financial part. The approach suggested here builds on Minsky's contributions revisited in the light of the subprime mortgage financial crisis. We start from a constructive criticism of the well-known Minskyan taxonomy of economic units (hedge, speculative, and Ponzi), and suggest a different approach that allows a continuous measure of the units' financial conditions. We use this alternative approach to account for the cyclical fluctuations of financial conditions that endogenously generate instability and fragility. We may thus suggest a precise definition of a Minsky moment as the starting point of a Minsky process, the phase of a financial cycle when many economic units suffer from both liquidity and solvency problems. Although the approach sketched here is very simple and requires extensions in many directions, we may draw from it a few policy insights on how to mitigate the financial cycle.
Review of Political Economy 01/2011; 23(1):49-67. DOI:10.1080/09538259.2011.526293
[Show abstract][Hide abstract] ABSTRACT: This paper discusses to what extent the recent trends in energy consumption and production are compatible with the requirements of sustainable development. For this purpose, starting from a simple identity applied to the energy sector, we use the decomposition analysis to derive a few analytical requirements for the long-term sustainability of the energy system and examine whether they are satisfied on the basis of the currently available data. From the analysis conducted in the paper, it emerges that an Environmental Kuznets Curve in energy intensity and/or carbon intensity may be insufficient to satisfy the sustainability conditions identified in the paper. Moreover, using simple graphical analysis, we show that the decomposition approach and the EKC imply two different relationships between per capita income (y) and carbon intensity (gy) and discuss the relative implications.
[Show abstract][Hide abstract] ABSTRACT: The Great Recession triggered by the subprime mortgage crisis raised serious questions on the responsibility of the economists as intellectuals, advisors and decision makers. This essay focuses on the responsibility of the academic economist in his role of researcher, teacher, divulgator, inspirer and supporter of a specific ideology (sometimes malgré lui). In the light of this analysis, the author briefly discusses the limits of the institutionalized and centralized evaluation systems of research quality recently adopted in many countries, and suggests an alternative approach to the evaluation of the merit of academic economists centred on the zeal shown in complying with all their duties.
[Show abstract][Hide abstract] ABSTRACT: This paper assumes that financial fluctuations are the result of the dynamic interaction between liquidity and solvency conditions
of individual financial units. The framework is designed as a heterogeneous agent model which proceeds through discrete time
steps within a finite time horizon. The interaction at the microlevel between financial units and the market maker, who is
in charge of clearing the market, produces interesting complex dynamics. The model is analyzed by means of numerical simulations
and agent-based computational economics (ACE) approach. The behaviour and evolution of financial units are studied for different
parameter regimes in order to show the importance of the parameter setting in the emergence of complex dynamics. Monetary
policy implications for the banking sector are also discussed.
Decision Theory and Choice: A Complexity Approach, Edited by M. Faggini, C.P. Vinci, 01/2010: pages 167-176; Springer-Verlag., ISBN: 978-88-470-1777-I
[Show abstract][Hide abstract] ABSTRACT: This experimental study aims to clarify to what extent and in which direction investors react to CSR (Corporate Social Responsibility) initiatives meant to upgrade the ethical standards of firms beyond the minimal requirements of law. Subjects in the laboratory were invited to invest their endowment in a portfolio of financial assets. We provided information on the expected returns of each stock and on its inclusion in an ethical index, or exclusion from it. Our findings show that subjects' behavior appears to be a function not only of their individual pay-offs but also of the information on the ethical standards of the firms issuing stocks. Most of them, however, did not show a fully irrational behavior as they consistently correlated the share of stocks with their expected returns. We may conclude that the sizeable reaction of our investors to the inclusion of a stock in the ethical index, or its exclusion from it, is the fruit of a deliberate choice.
Research in Economics 12/2009; 63(4):242-252. DOI:10.1016/j.rie.2009.09.004
[Show abstract][Hide abstract] ABSTRACT: The recent revival of Hyman P. Minsky's ideas among policymakers, economists, bankers, financial institutions, and the mass media, synchronized with the increasing gravity of the subprime financial crisis, demands a reappraisal of the meaning and scope of the "financial instability hypothesis" (FIH). We argue that we need a broader approach than that conventionally pursued, in order to understand not only financial crises but also the periods of financial calm between them and the transition from stability to instability. In this paper we aim to contribute to this challenging task by restating the strictly financial part of the FIH on the basis of a generalization of Minsky's taxonomy of economic units. In light of this restatement, we discuss a few methodological issues that have to be clarified in order to develop the FIH in the most promising direction.
[Show abstract][Hide abstract] ABSTRACT: This paper discusses whether recent energy trends are compatible with the requirements of sustainable development. For this purpose, using decomposition analysis, we derive a few long-term sustainability conditions for the energy system and examine whether they are satisfied on the basis of the currently available data. It emerges that an Environmental Kuznets Curve in energy intensity and/or carbon intensity is insufficient to satisfy the sustainability conditions identified in the paper. Moreover, using simple graphical analysis, we show that the decomposition approach and the EKC imply two different relationships between per capita income and carbon intensity and discuss the relative implications.
International Journal of Global Energy Issues 08/2009; 32(1):160-174. DOI:10.1504/IJGEI.2009.027979
[Show abstract][Hide abstract] ABSTRACT: This paper aims to bridge the gap between theory and facts on the so-called "Minsky moments" and "Minsky meltdowns" by revisiting the "financial instability hypothesis" in the light of the subprime financial crisis. We argue that we need an approach different and broader than the mainstream's, not only to understand Minsky moments but also the periods of financial calm between them. This approach, inspired by Minsky, leads us to interpret crucial stylized facts exhibited by recent financial crises through an elementary model of financial fluctuations that endogenously generates instability and fragility. The model here suggested builds on Minsky's contributions but introduces a few crucial modifications. In particular, we address a constructive criticism to the well-known Minskyan classification of financial units in three categories (hedge, speculative, and Ponzi) and suggest a different classification that allows a continuous measure of units' financial conditions. We show that this continuum of financial conditions may be aggregated into six categories of financial units that have a clear relation with Minsky's trinity. We use the suggested classification of economic units to explain the cyclical fluctuations of their financial conditions and the circumstances that lead to Minsky moments and, under given conditions, eventually to a Minsky meltdown. Finally, we use the approach here suggested to shed some light on the causes and consequences of financial crises and their policy implications.
[Show abstract][Hide abstract] ABSTRACT: This paper aims to help bridge the gap between theory and fact regarding the so-called "Minsky moments" by revisiting the "financial instability hypothesis" (FIH). We limit the analysis to the core of FIH--that is, to its strictly financial part. Our contribution builds on a reexamination of Minsky's contributions in light of the subprime financial crisis. We start from a constructive criticism of the well-known Minskyan taxonomy o f financial units (hedge, speculative, and Ponzi) and suggest a different approach that allows a continuous measure of the unit's financial conditions. We use this alternative approach to account for the cyclical fluctuations of financial conditions that endogenously generate instability and fragility. We may thus suggest a precise definition of the "Minsky moment" as the starting point of a Minskyan process--the phase of a financial cycle when many financial units suffer from both liquidity and solvency problems. Although the outlined approach is very simple and has to be further developed in many directions, we may draw from it a few policy insights on ways of stabilizing the financial cycle.
[Show abstract][Hide abstract] ABSTRACT: The increased scrutiny of investors regarding the non-financial aspects of corporate performance have placed portfolio managers in the position of having to weigh the benefits of “holding the market” against the cost of having positions in companies that are subsequently found to have questionable business practices. The availability of stock indexes based on sustainability screening makes increasingly viable for institutional investors the transition to a portfolio based on a Socially Responsible Investment (SRI) benchmark at relatively low cost. The increasing share of socially responsible investments may play a role in providing incentives towards a continuous upgrading of sustainability standards to the extent that their performance is not systematically inferior to that of the other funds. This paper examines whether these incentives have been so far detectable with particular reference to the Dow Jones Sustainability Stoxx Index (DJSSI) that focuses on the European corporations with the highest CSR scores among those included in the Dow Jones Stoxx 600 Index. The aim of the paper is twofold. First, we analyse the performance of the DJSSI over the period 2001-2006 compared to that of the Surrogate Complementary Index (SCI), a new benchmark that includes only the components of the DJ Stoxx 600 that do not belong to the ethical index in order to evaluate more correctly the size of possible divergent performances.Second, we perform an event study on the same data set to analyse whether the stock market evaluation reacts to the inclusion (deletion) in the DJSSI. In both cases the results suggest that the evaluation of the CSR performance of a firm is a significant criterion for asset allocation activities.
Journal of Business Ethics 02/2008; 87(S1). DOI:10.1007/s10551-008-9793-1 · 1.33 Impact Factor
[Show abstract][Hide abstract] ABSTRACT: Abstract This paper aims to establish systematic relationships between the two rapidly growing research streams on the socio-economic determinants of happiness and health. Although they have been pursued quite independently by different communities of researchers, empirical evidence points to very similar underlying causal mechanisms. In particular, in both cases per capita income seems to play a major role only up to a very low threshold, beyond which relative income and other relational factors become crucial for happiness and health.
On the basis of these structural analogies, we argue that a process of cross-fertilisation between these two research streams would contribute to their development by clarifying the relationship between happiness, health and their determinants. Finally, we observe that the two literatures have converging policy implications: measures meant to reduce poverty and inequality and invest in social and environmental capital may improve both health and happiness of the individuals.
[Show abstract][Hide abstract] ABSTRACT: This paper presents and discusses the contents of two books edited by Luigino Bruni and Pier Luigi Porta (2004 and 2006) on the evolution of self-reported happiness in developed economies and its interrelations with economic growth and citizen’s freedom. The author summarizes the main determinants of happiness according to the recent empirical literature as discussed in the chapters assembled by the editors of the books here reviewed. None of these factors is sufficient by itself to explain the «paradox of happiness», that is the decoupling between the trends of self-reported happiness and of income per head. However, when we consider them together, the paradox disappears. The actual paradox is the persistent use of the PIL statistics to measure the well-being (or happiness) of citizen’s notwithstanding well-known shortcomings further clarified and emphasized by the literature here reviewed.
[Show abstract][Hide abstract] ABSTRACT: Standard economics is based on methodological individualism but this does not imply that the individuals play a crucial role
in its models. On the contrary, in such a theory the individual is deprived of authentic subjective characteristics and plays
no sizeable role as genuine subject. The so called Homo economicus is just a signpost for given preferences that, however, are generally conceived as exogenous and invariant through time.
Therefore, the genuine psychological features of the economic agent do not matter.