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The ‘Farmerian’ Approach to Ending a Finance‐Induced Recession: Notes on Stability and Dynamics
Author(s) -
GUERRAZZI MARCO
Publication year - 2012
Publication title -
economic notes
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.274
H-Index - 19
eISSN - 1468-0300
pISSN - 0391-5026
DOI - 10.1111/j.1468-0300.2012.00240.x
Subject(s) - recession , economics , debt , stock market , baseline (sea) , dynamics (music) , value (mathematics) , stock (firearms) , stability (learning theory) , interest rate , econometrics , macroeconomics , monetary economics , computer science , mechanical engineering , paleontology , oceanography , physics , horse , machine learning , acoustics , engineering , biology , geology
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 at altering the trade‐off between holding risky and safe assets.