Abstract for: An Institutional Dynamics Model of the Euro zone Crisis: Greece as an Illustrative Example
The current turmoil in the financial markets forces us to question the validity and relevance of the present economic theories. Complex dynamics characterized by bounded rationality and strong impact of expectations on the markets provides an independent source of fundamental uncertainty and this one can lead to speculative bubbles in assets markets triggering growth of public debt. The neoclassical methodology based on logical empiricism and deductive reasoning has failed to show what is going on in the real world. We will employ the institutionalist's view and focus on the behavioral aspects of the system modeling decision making process. We illustrate this approach with a model drawn from the current Greek sovereign debt crisis and its bailout discussions. The main benefit expected is the increased realism of the model itself. The discrepancies between theoretical predictions and observed behavior have had a major negative impact on economic models and system dynamicists can contribute a significant amount of value to institutional economics.