Systemic Financial Feedbacks – Conceptual Framework and Modelling Implications

Different approaches to model feedbacks in financial systems are assessed based on requirements for the conceptualization of feedback dynamics. Given the diversity and non†linearity of systemic financial feedbacks (SFFs), modelling concepts have to be evaluated in the context of system adaption, specifically systemic interconnectivity and behaviour. Methodological approaches from System Dynamics (SD) theory are considered to provide appropriate and attractive features. Surprisingly, few SD models exist to explain SFFs. The scarcity of SD modelling for SFFs may be attributed to the lack of empirically supported economic foundations and methodological challenges for theoretical modelling. This paper considers a conceptual framework for modelling SFFs. The framework emerges from the synthesis of modelling requirements for SFFs, limitations of existing modelling approaches, and innovations from SD. In doing so, this study provides evidence for the contribution of SD concepts to complement existing SFF models and offers suggestions for further modelling towards a ‘dual approach’. Copyright © 2016 John Wiley & Sons, Ltd.

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