In this paper, I explore the out-of-equilibrium dynamics of Farmer’s ME-NA model. Maintaining the assumption that all the variables continuously have the same time reference, I build a model that describes the adjustments of the value of output and the interest rate under the hypothesis that public debt and the stock market value are given. Within this framework, I show that the economy has a unique stationary solution whose dynamics are stable. Moreover, simulating the model under its baseline calibration, I show that adjustments towards the steady-state occur through convergent oscillations while the most promising way out from a finance-induced recession is a policy mix that combines a mild fiscal expansion with interventions aimed ataltering the trade-off between holding risky and safe assets.
The 'Farmerian' Approach To Ending A Finance-Induced Recession: Notes On Stability And Dynamics
GUERRAZZI, MARCO
2012-01-01
Abstract
In this paper, I explore the out-of-equilibrium dynamics of Farmer’s ME-NA model. Maintaining the assumption that all the variables continuously have the same time reference, I build a model that describes the adjustments of the value of output and the interest rate under the hypothesis that public debt and the stock market value are given. Within this framework, I show that the economy has a unique stationary solution whose dynamics are stable. Moreover, simulating the model under its baseline calibration, I show that adjustments towards the steady-state occur through convergent oscillations while the most promising way out from a finance-induced recession is a policy mix that combines a mild fiscal expansion with interventions aimed ataltering the trade-off between holding risky and safe assets.
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