An Agent-Based Model of the Current Economic Crisis

This research project creates a computational model of the current financial crisis to discover the essential elements needed to reproduce the crisis, while investigating alternative policies that may have reduced its intensity and strategies for recovery.

What caused the current economic crisis, how could it have been prevented, and what is the best way to get out of it? The crisis has been blamed on many factors, including the housing bubble, credit default swaps, too much leverage, too much concentration in the banking sector, inconsistent government interventions in the banking sector, lack of regulation, excessive CEO compensation, agency problems (e.g. by the firms rating bonds), and greed in general. There are just as many provisions for solving it, including Keynesian style economic stimuli, lowering taxes, providing guarantees to banks so they will lend more, and doing nothing. Similarly, there are many provisions for avoiding crises in the future, including stronger collateral requirements, market transparency requirements, restrictions on derivatives, and better monitoring of markets and leverage in particular. This project builds an agent-based model in which all the major market institutions that played important roles in the recent crisis are represented: housing and mortgage markets, credit and capital markets, banks and other financial institutions, securitization processes and investors, consumers, firms, and regulatory agencies. The model could eventually be developed to build an interactive tool which regulators can use to perform simulation of economic policies.