A Disequilibrium Multi-Country Macroeconomic Model with Agent-Based Portfolio Investors

Abstract

How does a business cycle in one country impact another country when they are linked through international trade and finance? Does fluctuation in exchange rates effectively wall off the ripple effect of a change in price or aggregate demand in one country to other countries? Will providing international liquidity benefit the key currency country? Do trans-national security investments by fund managers stabilize or destabilize global economy? To answer these questions, we constructed a disequilibrium dynamic macroeconomic model of multiple countries that engage in international trade and portfolio investments.The novelty of the paper is that countries are asymmetric; only one country serves as a provider of international liquidity to settle payments for international transactions. Interest rates, price, wage rates but also exchange rates are macro founded. All the variables are endogenously determined and the model is completely closed in terms of balance sheet. Moreover, there are multiple agent-based fund managers that operate trans-nationally. They invest their funds in bonds across national boundaries. The fund managers have their own models to determine the international portfolio composition of their funds. They acquire main economic indicators of all countries and observe other managers performances, according to which they update the allocations rules, which in turn influence the exchange rates.Each country has a large number of identical price-taking firms and households. It also has a banking sector, represented by a single commercial bank that provides investment funds to the demand-constrained firms, thus providing money supply endogenously. In each country, there are commodity, labor, bond, money, and foreign exchange (to the key currency) markets. Output price, wage rate, interest rate adjust gradually to demand and supply in the respective markets. Firms located in different countries produce horizontally differentiated commodities so that households in each country purchase consumer goods that are produced domestically or by foreign producers. The price competitiveness is mainly determined by labor cost denominated in the same currency, hence influenced by a change in exchange rate.The tentative results we obtained are that the key currency country has no clear advantage over the other countries. The difference in price levels among countries is largely offset by a fluctuation in exchange rates. Nonetheless, countries are tightly synchronized with each other even under the influence of fluctuations in exchange rates. Further, the simulation result suggests that a less restricted flow of funds across the national boundaries would enhance the stability of the economies.