Journal Article
No. 2012-27 | July 12, 2012
Debt Deleveraging and Business Cycles. An Agent-Based Perspective


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



Cite As

Marco Raberto, Andrea Teglio, and Silvano Cincotti (2012). Debt Deleveraging and Business Cycles. An Agent-Based Perspective. Economics: The Open-Access, Open-Assessment E-Journal, 6 (2012-27): 1–49.

Comments and Questions

Philip George - Business Cycles and Credit Expansion
July 13, 2012 - 04:37

The idea that the 2007-2009 financial crisis was caused by excessive credit is so widespread that I am sure there will be hearty sniggers all around when I suggest that the crisis was really caused by too little credit expansion.

To prove my case let me advance some hard ...[more]

... data and begin with some basic arguments. M1 consists of checks and demand deposits. It is money that is used as a medium of exchange. M2 consists of M1 plus savings deposits, time deposits and the like. When you subtract M1 from M2 you get the amount of money that is available for lending. Since 1994 banks in the US have been allowed to carry out sweeps so that they don't have to maintain reserves on unspent money. So for the US you add sweeps to the difference between M2 and M1 to get the amount of money available for lending. Next you compare this money with the total loans and leases made by commercial banks. The result is the two graphs on

You will observe that the gap between money available for lending and actual loans made was at its peak just before the onset of the crisis.

So why should this have caused the crisis? The answer is that lower interest rates made it unprofitable for banks and other institutions to lend. Therefore they speculated on financial assets and encouraged their customers to do the same (since they earned a fee on this). This speculation caused a spike in the prices of financial assets. When the Fed raised interest rates the prices of financial assets crashed, resulting in a hit on bank balance sheets, and then a contraction on the real economy.

Money is indeed endogenous but this endogeneity does not arise because banks create loans out of nothing. The graph on the figure shows that for half a century loans have been less than the money available for lending, ie. that loans are always created out of savings. You could regard this as the Law of Conservation of Money which is another way of saying that a closed system cannot create money out of nothing.

The endogeneity comes about because money as asset is converted into money as medium of exchange. You could call this the Principle of Complementarity in parallel with the use of the same idea in physics. When money is in the process of being spent it is a Medium of Exchange. At all other times it is an Asset.

To completely understand endogeneity you also need the Principle of Equivalence. When a bank takes money from my savings account and lends it to a firm it creates money (as medium of exchange). When I move money from my savings account to my demand deposit, I similarly create money (as medium of exchange). The two actions are indistinguishable from each other through their effects.

You will note that the gap between money available for lending and actual loans made is today of the same order as it was before the last crash. It is an indication that another crash is on the way.

David Chester - Causes and Presentation
July 13, 2012 - 09:38

I am very favourably impressed by this paper, because unlike so many it deals with facts and factual statements in a clear and specific way. This does not mean that these fact are necessarily correct, in reality the cause of the 2008 crisis was different, but the presentation here is ...[more]

... good if not excellent. The variation on the word Leverage in the title is unfortunate and should be replaced by something else. This expression is inadequate in any case, for much of modern macroeconomic thought.

The cause of the recent economic crisis was due to speculation in land values and not due directly to the credit associated with them, as claimed here. Consequently the assocaited modelling does not fully represent the whole of our macroeconomics (social) system nor does it cover the part which of it which is the origin for much of our lack of progress, regardless of any crisis, namely speculation in land values and in other natural resources.

The business of credit management and banking has been blamed for much of our recent economic woes. But it is unfair to blame this credit situation on all that has happened over recent years.