Financial instability contagion: a dynamical systems approach |
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Authors: | Giuseppe Castellacci |
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Affiliation: | Department of Mathematics, New York Univerity , New York , NY , USA |
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Abstract: | We build a multi-agent dynamical system for the global economy to investigate and analyse financial crises. The agents are large aggregates of a subeconomy, and the global economy is a collection of subeconomies. We use well-known theories of dynamical systems to represent a financial crisis as propagation of a negative shock on wealth due the breakage of a financial equilibrium. We first extend the framework of the market instability indicator, an early warning signal defined for a single economy as the spectral radius of the Jacobian matrix of the wealth dynamical system. Then, we formulate a quantitative definition of instability contagion in terms thereof. Finally, we analyse the mechanism of instability contagion for both single and multiple economies. Our contribution is to provide a methodology to quantify and monitor the level of instability in sectors and stages of a structured global economic model and how it may propagate through its components. |
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Keywords: | Sovereign credit Systemic risk Contagion Multi-economy model Market instability indicator |
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