Game Theoretic Modeling of Economic Systems and the European Debt Crisis

Welburn, Jonathan William; Hausken, Kjell

doi:10.1007/s10614-015-9542-3

Cited by 8 publications

(3 citation statements)

References 37 publications

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“…It is also worth noticing that the main component of the bank sector development that transmits the negative effect on economic growth is credit to the private sector. However, the results seems to be in contrast with the findings of a recent study by Welburn and Hausken (2017), who argued that contagion through credit or trade channels, or common macroeconomic conditions without contagion, can cause crises, and this is the case only for EU countries that may default due to high levels of government debt. Nevertheless, in the current study, credit is examined from another aspect, as a main component of the financial bank sector development, having a significant impact on NPLs, and the European Union has put significant efforts into dealing with high stock of NPLs, through recapitalization of banks.…”

Section: Mechanisms For the Financial Bank Sector Developmentcontrasting

confidence: 99%

The mechanisms linking the finance-growth relationship in view of the financial crisis: an empirical investigation of the EU countries

Asteriou

Spanos

2021

JES

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PurposeThe paper aims to explore the mechanisms linking the impact of financial development on economic growth and focuses on the long-term post-global financial crisis.Design/methodology/approachThe study employs panel data for twenty-five European Union countries over the period 1995–2017. Principal Component Analysis is employed to produce two aggregate indices, namely financial banking sector development and stock market sector development. The empirical analysis is based on estimates through the autoregressive distributed lag (ARDL) method.FindingsThe results suggest that the outbreak of the crisis has led to a disruption of the positive finance-growth relationship, and the banking sector dominates in this adverse effect. The foreknowledge of the current study is that the linking mechanisms of the negative impact of financial development on economic growth, ten years after the global financial crisis, are household debt, private debt, and non-performing loans for the banking sector, while for the equity market this is the case through savings. Interestingly, the results reveal that unemployment increase excessively the borrowers' debt level and then the non-performing loans.Research limitations/implicationsAn implication is that the increase of credit supply and any monetary expansion along with lack of regulatory control and monitoring can lead banks to a higher risk exposure through household and private debt as well as non-performing loans. Besides, the higher levels of unemployment rates call attention for the trade-off between prudential regulation on the supply of loans and economic activity, since higher unemployment affect the non-performing loans and, as a consequence discourage the demand, increase precautionary savings, and cancel or postpone investment decisions, thus, affecting the equity market.Originality/valueThe paper provides useful insights to economists and policymakers who are interested in understanding the weakness of banking and stock market sectors to promote economic growth for a long time after the global financial crisis.

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Section: Mechanisms For the Financial Bank Sector Developmentcontrasting

confidence: 99%

The mechanisms linking the finance-growth relationship in view of the financial crisis: an empirical investigation of the EU countries

Asteriou

Spanos

2021

JES

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“…Welburn and Hausken [15,16] theoretically analyzed the economic crises game, assuming six kinds of players, i.e., countries, central banks, banks, firms, households, and financial inter-governmental organizations. Players have strategies such as setting interest rates, lending, borrowing, producing, consuming, investing, importing, exporting, defaulting, and penalizing default.…”

Section: Game Theory Analysesmentioning

confidence: 99%

Governmental Taxation of Households Choosing between a National Currency and a Cryptocurrency

Wang

Hausken

2021

Games

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: A game between a representative household and a government was analyzed. The household chose which fractions of two currencies to hold, e.g., a national currency such as a Central Bank Digital Currency (CBDC) and a global currency such as Bitcoin or Facebook’s Diem, and chose the tax evasion probability for each currency. The government chose, for each currency, the probability of detecting and prosecuting tax evasion, the tax rate, and the penalty factor imposed on the household when tax evasion was successfully detected and prosecuted. The household′s fraction of the national currency, the government’s monitoring probability of the national currency, and the penalty factor imposed on the global currency, increased in the household′s Cobb Douglas output elasticity for the national currency. The household′s probabilities of tax evasion on both currencies increased in the government’s Cobb Douglas output elasticity for the national currency. The government’s taxation on both currencies decreased in the output elasticity for the national currency. High output elasticity for the national currency eventually induced the government to tax that currency more than the global currency. The household′s probability of tax evasion on the global currency increased in the government’s output elasticity for that currency. The household was less (more) likely to tax evade on the national (global) currency if the government valued taxation and penalty on the national (global) currency. The results are illustrated numerically where each of the eight parameter values were varied relative to a benchmark.

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“…Welburn and Hausken (2015, 2017) model the strategies of countries, central banks, banks, firms, households and financial inter-governmental organizations in handling crises where countries may default. They find that contagion through credit or trade channels, or common macroeconomic conditions without contagion, can cause crises.…”

Section: Introductionmentioning

confidence: 99%

Assessing the 2010–2018 financial crisis in Greece, Portugal, Ireland, Spain, and Cyprus

Hausken

Welburn

2020

JES

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PurposeThe article develops a model to interpret the 2010–2018 financial crisis in Greece, Portugal, Ireland, Spain and Cyprus, and the loan programs from the IL (International Lender; i.e. the European Union, the European Commission, and the International Monetary Fund).Design/methodology/approachFor each country, an isoelastic utility with constant relative risk aversion is assumed. For the IL a Cobb Douglas utility is assumed with consumption, the GDP (Gross Domestic Product) to debt ratio, and market stability as inputs, accounting for time discounting. This article applies two methods to assess the empirics. The first method considers the IL's strategy as a whole over the 2010–2018 period. The second method assumes that the IL maximizes its utility in one period to determine its optimal loan, accounting for the empirics in that period, and the debt in the previous period.FindingsFor the first method, when the output elasticity in the IL's Cobb Douglas utility is high favoring consumption, the IL prefers offering a higher loan than its actual loan. Otherwise the IL prefers to offer no loan. The output elasticity at which the IL prefers to offer a loan is lowest for Greece, second lowest for Cyprus, third lowest for Portugal, and highest for Ireland and Spain. A high loan to Greece over a larger range of the output elasticity for Greece's consumption is supported by Greece being prioritized through the loan program. For the second method, the IL prefers to offer no loan to Greece which is too burdened with debt. Thus, the first method seems preferable, considering the entire duration of the crisis holistically.Originality/valueThe article offers a novel perspective of how to assess debt crises, enabling the IL to weigh various factors such as consumption, GDP, loan offered, and each country's debt to credit markets.

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Game Theoretic Modeling of Economic Systems and the European Debt Crisis

Cited by 8 publications

References 37 publications

The mechanisms linking the finance-growth relationship in view of the financial crisis: an empirical investigation of the EU countries

The mechanisms linking the finance-growth relationship in view of the financial crisis: an empirical investigation of the EU countries

Governmental Taxation of Households Choosing between a National Currency and a Cryptocurrency

Assessing the 2010–2018 financial crisis in Greece, Portugal, Ireland, Spain, and Cyprus

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