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Financial Distortions and Macroeconomic Performance: Expectations, Constraints and Interaction of Agents

Objective

The ability of financial markets to bear risk is central to economic welfare and stability. Growth and economic wellbeing is inhibited if financial markets are unable to transfer resources efficiently from the suppliers of liquidity to entrepreneurs. However, this proper functioning of financial markets has been distorted by levels of volatility considerably in excess of those implied by fundamentals. Markets have undergone dramatic crashes and they display speculative bubbles with market prices far removed from their equilibrium values. Economic research has hitherto been able to make only limited progress in resolving these important practical and policy relevant issues of the apparent instability in financial markets. This proposal seeks to develop elements of a new paradigm which (i) explicitly takes into account the existence of various forms of heterogeneous, boundedly rational behaviour in financial markets as well as in goods and labour markets, (ii) investigates the potential of such behaviour to generate bubbles, crashes and a system-wide break down of activity as collective outcomes of individual activities, (iii) investigates the linkages and repercussions between the complex area of financial activity and real economic activity which could be affected by e.g., the cancellation of credit lines and a breakdown of expected liquidity provision, (iv) studies how the transmission channel of monetary policy works in times of distress in the financial markets (particularly the interbank market) and how it could restore the credit flow from banks to companies operating in the real sector. We will adopt a methodologically pluralistic approach trying to augment existing macro models and construct new (agent-based) ones from bottom-up. The results will provide insights into the consequences of different modelling paradigms for the conduct of monetary policy, and in particular, appropriate reactions of monetary authorities to prevalent financial distress.

Field of science

  • /social sciences/economics and business/business and management/commerce
  • /social sciences/economics and business/business and management/employment

Call for proposal

FP7-SSH-2013-2
See other projects for this call

Funding Scheme

CP-FP - Small or medium-scale focused research project

Coordinator

CHRISTIAN-ALBRECHTS-UNIVERSITAET ZU KIEL
Address
Olshausenstrasse 40
24118 Kiel
Germany
Activity type
Higher or Secondary Education Establishments
EU contribution
€ 652 440
Administrative Contact
Linda Piálek (Ms.)

Participants (6)

UNIVERSITAT JAUME I DE CASTELLON
Spain
EU contribution
€ 253 920
Address
Avenida Vicent Sos Baynat S/n
12006 Castellon De La Plana
Activity type
Higher or Secondary Education Establishments
Administrative Contact
Ismael Rodrigo-Martínez (Mr.)
UNIVERSITA POLITECNICA DELLE MARCHE
Italy
EU contribution
€ 198 000
Address
Piazza Roma 22
60121 Ancona
Activity type
Higher or Secondary Education Establishments
Administrative Contact
Francesco Maria Chelli (Prof.)
LONDON SCHOOL OF ECONOMICS AND POLITICAL SCIENCE
United Kingdom
EU contribution
€ 306 000
Address
Houghton Street 1
WC2A 2AE London
Activity type
Higher or Secondary Education Establishments
Administrative Contact
Milena Vasileva (Ms.)
ZEW - LEIBNIZ-ZENTRUM FUR EUROPAISCHE WIRTSCHAFTSFORSCHUNG GMBH MANNHEIM
Germany
EU contribution
€ 278 400
Address
L 71, 1
68161 Mannheim
Activity type
Research Organisations
Administrative Contact
Jürgen Finger (Mr.)
USTAV TEORIE INFORMACE A AUTOMATIZACE AV CR VVI
Czechia
EU contribution
€ 192 000
Address
Pod Vodarenskou Vezi 4 Liben
182 00 Praha 8
Activity type
Research Organisations
Administrative Contact
Jaroslava Maresova (Ms.)
WIRTSCHAFTSUNIVERSITAT WIEN
Austria
EU contribution
€ 271 200
Address
Welthandelsplatz 1
1020 Wien
Activity type
Higher or Secondary Education Establishments
Administrative Contact
Reinhard Sefelin (Mr.)