Skip to content
BY 4.0 license Open Access Published by De Gruyter Open Access July 12, 2012

Debt, Deleveraging and Business Cycles: An Agent-Based Perspective

  • Marco Raberto EMAIL logo , Andrea Teglio and Silvano Cincotti
From the journal Economics


The recent financial crises pointed out the central role of public and private debt in modern economies. However, even if debt is a recurring topic in discussions about the current economic situation, economic modeling does not take into account debt as one of the crucial determinants of economic dynamics. The authors’ contribution, in this paper, is to investigate the issues of borrowing and debt load by means of computational experiments, performed in the environment of the agent-based Eurace simulator. The authors aim to shed some light on the relation between debt and main economic indicators. Their results clearly confirm that the amount of credit in the economy is a very important variable, which can affect economic performance in a twofold way: fostering growth or pushing the economy into recession or crisis. The outcomes of their computational experiments show a rich scenario of interactions between real and financial variables in the economy, and therefore represent a truly innovative tool for the study of economics.

JEL Classification: E2; E3; E44; E51


Adrian, T., and Shin, H. S. (2010). Liquidity and leverag. Journal of Financial Intermediation, 19: 418–437.Search in Google Scholar

Arestis, P., and Sawyer, M. (2006). The nature and role of monetary policy when money is endogenous. Cambridge Journal of Economics, 30(6): 847–860.Search in Google Scholar

Basel Committee on Banking Supervision (2006). International convergence of capital measurement and capital standards: A revised framework - comprehensive version. Technical report, BIS, in Google Scholar

Benartzi, S., and Thaler, R. H. (1995). Myopic loss aversion and the equity premium puzzle. The Quarterly Journal of Economics, 110(1): 73–92.Search in Google Scholar

Bernanke, B., and Gertler, M. (1990). Financial Fragility and Economic Performance. Quarterly Journal of Economics, 105(1): 87–114.Search in Google Scholar

Bernanke, B., and Gertler, M. (1995). Inside the Black Box: The Credit Channel of Monetary Policy Transmission. Journal of Economic Perspectives, 9(4): 27–48.Search in Google Scholar

Carroll, C. D. (2001). A theory of the consumption function, with and without liquidity constraints. Journal of Economic Perspectives, 15(3): 23–45.10.3386/w8387Search in Google Scholar

Chiarella, C., and Di Guilmi, C. (2011). The financial instability hypothesis: A stochastic microfoundation framework. Journal of Economic Dynamics & Control, 35(8): 1151–1171.Search in Google Scholar

Cincotti, S., Raberto, M., and Teglio, A. (2010). Credit Money and Macroeconomic Instability in the Agent-based Model and Simulator Eurace. The Open-Access, Open-Assessment E-Journal, 4(2010-26).10.5018/economics-ejournal.ja.2010-26Search in Google Scholar

Dawid H., Gemkow S., Harting P., Kabus K., Wersching K., and Neugart M. (2008). On the Effects of Skill Upgrading in the Presence of Spatial Labor Market Frictions: An Agent-Based Analysis of Spatial Policy Design. Journal of Economics and Statistics, 228(2+3): 251-275.Search in Google Scholar

Dawid H., Gemkow S., Harting P., and Neugart M. (2009). On the Effects of Skill Upgrading in the Presence of Spatial Labor Market Frictions: An Agent-Based Analysis of Spatial Policy Design. Journal of Artificial Societies and Social Simulation, 12(4): 5.Search in Google Scholar

De Grauwe, P. (2010). The scientific foundation of dynamic stochastic general equilibrium (DSGE) models. Public Choice, 144(3-4): 413–443.Search in Google Scholar

Deaton, A. (1992). Household saving in LDCs: credit markets, insurance and welfare. The Scandinavian Journal of Economics, 94(2): 253–273.Search in Google Scholar

Delli Gatti, D., Di Guilmi, C., Gaffeo, E., Giulioni, G., Gallegati, M., and Palestrini, A. (2005). A new approach to business fluctuations: heterogeneous interacting agents, scaling laws and financial fragility. Journal of Economic behavior & organization, 56(4): 489–512.Search in Google Scholar

Delli Gatti, D., Gallegati, M., Greenwald, B. C., Russo, A., and Stiglitz, J. E. (2009). Business fluctuations and bankruptcy avalanches in an evolving network economy. Journal of Economic Interaction and Organization, 4(2): 195–212.Search in Google Scholar

Eggertsson, G. B., and Krugman, P. (2010). Debt, Deleveraging and the Liquidity Trap: a Fisher-Minsky-Koo approach.10.1057/9780230280854_18Search in Google Scholar

Fabiani F., Druant M., Hernando I., Kwapil C., Landau B., Loupias C., Martins F., Matha F., Sabbatini R., Stahl H. and Stokman A. (2006). What firms’ surveys tell us about price-setting behavior in the Euro Area. International Journal of Central Banking, 2(3): 1–45.Search in Google Scholar

Fazzari, S. M., Ferri, P., and Greenberg, E. (2008). Cash flow, investment, and Keynes-Minsky cycles. Journal of Economic Behavior & Organization, 65(3-4): 555–572.Search in Google Scholar

Fisher, I. (1933). The Debt-Deflation Theory of Great Depressions. Econometrica, 1(4): 337–357.Search in Google Scholar

Fontana, G. (2003). Post Keynesian approaches to endogenous money: a time framework explanation. Review of Political Economy, 15: 291–314.Search in Google Scholar

Friedman, M., and Schwartz, A. J. (1963). Money and business cycles. The Review of Economics and Statistics, 45(1): 32–64.Search in Google Scholar

Geanakoplos, J. (2010). Solving the present crisis and managing the leverage cycle. FRBNY Economic Policy Review, pages 101–131.10.2139/ssrn.1539488Search in Google Scholar

Greenwald, B. C., and Stiglitz, J. E. (1993). Financial market imperfections and business cycles. Q J Econ, 108(1): 77–114.Search in Google Scholar

Kahneman, D., and Tversky, A. (1979). Prospect theory: an analysis of decision under risk. Econometrica, 47(2): 263–292.Search in Google Scholar

Keen, S. (2009). The global financial crisis, credit crunches and deleveraging. Journal of Australian Political Economy, (64): 22–36.Search in Google Scholar

Kiyotaki, N., and Moore, J. (1997). Credit cycles. Journal of Political Economy, 105(2): 211–248.Search in Google Scholar

Kiyotaki, N., and Moore, J. (2002). Balance sheet contagion. American Economic Review, 92(2): 46–50.Search in Google Scholar

Koo, R. (2008). The Holy Graal of Macroeconomics: Lessons from Japan’s Great Recession. Wiley.Search in Google Scholar

Kriesler, P., and Lavoie, M. (2007). The New Consensus on Monetary Policy and its Post-Keynesian Critique. Review of Political Economy, 19(3): 387–404.Search in Google Scholar

Krugman, P. (1999). Balance Sheets, The Transfer Problem, and Financial Crises. International Tax and Public Finance, 6(4): 459–472.Search in Google Scholar

Kydland, F. E., and Prescott, E. C. (1982). Time to Build and Aggregate Fluctuations. Econometrica, 50(6): 1345–1370.Search in Google Scholar

Lucas, R. (1972). Expectations and the Neutrality of Money. J Econ Theory, 4: 103–124.Search in Google Scholar

McKinsey Global Institute (2010). Debt and deleveraging: the global credit bubble and its economic consequences. Discussion paper, MCKinsey Global Institute.Search in Google Scholar

Minsky, H. (1986). Stabilizing an Unstable Economy. Yale University Press.Search in Google Scholar

Myers, S., and Majluf, N. (1984). Corporate Financing and Investment Decisions when Firms have Information that Investors Do Not Have. Journal of Financial Economics, 13(2): 187–221.10.3386/w1396Search in Google Scholar

Patinkin, D. (1965). Money, Interest, and Prices. Harper and Row, 2 edition.Search in Google Scholar

Raberto, M., Teglio, A., and Cincotti, S. (2008a). Integrating real and financial markets in an agent-based economic model: an application to monetary policy design. Computational Economics, forthcoming.10.1007/s10614-008-9138-2Search in Google Scholar

Raberto, M., Teglio, A., and Cincotti, S. (2008b). Prospect Theory Behavioral Assumptions in an Artificial Financial Economy, volume 614 of Lecture Notes in Economics and Mathematical Systems, pages 55–66. Springer.10.1007/978-3-540-70556-7_5Search in Google Scholar

Saunders and Allen (2010). Credit Risk. Measurement In and Out of the Financial Crisis. John Wiley & Sons.Search in Google Scholar

Silver, A., Pyke, D., and Peterson, R. (1998). Inventory Management and Production Planning and Scheduling. John Wiley & Sons.Search in Google Scholar

Teglio, A., Raberto, M., and Cincotti, S. (2009). Explaining equity excess return by means of an agent-based financial market, volume 631 of Lecture Notes in Economics and Mathematical Systems, chapter 12, pages 145–156. Springer Verlag.Search in Google Scholar

Teglio, A., Raberto, M., and Cincotti, S. (2010a). Balance Sheet Approach to Agent-Based Computational Economics: The EURACE Project. In C. Borgelt, G. González-Rodríguez, W. Trutschnig, M. Lubiano, M. Gil, P. Grzegorzewski, and O. Hryniewicz (Eds.), Combining Soft Computing and Statistical Methods in Data Analysis, volume 77 of Advances in Intelligent and Soft Computing, pages 603–610. Springer Berlin /Heidelberg.10.1007/978-3-642-14746-3_74Search in Google Scholar

Teglio, A., Raberto, M., and Cincotti, S. (2010b). Endogenous Credit Dynamics as Source of Business Cycles in the EURACE Model. In M. Li Calzi, L. Milone, and P. Pellizzari (Eds.), Progress in Artificial Economics, volume 645 of Lecture Notes in Economics and Mathematical Systems, pages 203–214. Springer Berlin Heidelberg. isbn 978-3-642-13947-5.10.1007/978-3-642-13947-5_17Search in Google Scholar

Teglio, A., Raberto, M., and Cincotti, S. (2011). Do Capital Requirements Affect Long-Run Output Trends? In S. Osinga, G. J. Hofstede, and T. Verwaart (Eds.), Emergent Results of Artificial Economics, volume 652 of Lecture Notes in Economics and Mathematical Systems, pages 41–52. Springer Berlin Heidelberg. isbn 978-3-642-21108-9.10.1007/978-3-642-21108-9_4Search in Google Scholar

Teglio, A., Raberto, M., and Cincotti, S. (2012). The impact of banks’ capital adequacy regulation on the economic system: an agent-based approach. Advances in Complex Systems, forthcoming.10.1142/S0219525912500403Search in Google Scholar

Tesfatsion, L., and Judd, K. (2006). Agent-Based Computational Economics, volume 2 of Handbook of Computational Economics. North Holland.Search in Google Scholar

Tversky, A., and Kahneman, D. (1992). Advances in prospect theory: cumulative representation of uncertainty. Journal of Risk and Uncertainty, 5(4): 297–323.Search in Google Scholar

Werner, R. A. (2005). New Paradigm in Macroeconomics: Solving the Riddle of Japanese Macroeconomic Performance. Palgrave Macmillan.Search in Google Scholar

Published Online: 2012-07-12
Published in Print: 2012-12-01

© 2012 Marco Raberto et al., published by Sciendo

This work is licensed under the Creative Commons Attribution 4.0 International License.

Downloaded on 6.6.2023 from
Scroll to top button