3 June 2010
Ex Boccherini - Piazza S. Ponziano 6 (Conference Room )
Large scale changes in the structure of the economy or financial markets, such as the current economic crisis, have their origin in the behavioral rules which agents follow. In some cases, rules have a self-reinforcing effect: the more agents adopt a rule, the more it becomes reasonable for others to accept it. This promotes such rules to social norms. Example include trusting counter-parties in financial transactions and (over-) reliance on credit rating. However, as rules develop and spread, becoming the norm, they may have consequences at the aggregate level which are not anticipated by the individuals. In particular, the conditions under which rules self-reinforce may gradually erode, thus provoking sharp transitions whereby most agents suddenly change their behavior. I will argue that the liquidity crisis in credit derivative markets and in the interbank market can indeed be traced back to these effects. This provides hints on policy measures and on the regulation of financial markets.