Abstract
The ``new consensus'' DSGE(dynamic stochastic general equilibrium) macroeconomic model has microfoundations provided by a single representative agent. In this model shocks to the economic environment do not have any lasting effects. In reality adjustments at the micro level are made by heterogeneous agents, and the aggregation problem cannot be assumed away. In this paper we show that the discontinuous adjustments made by heterogeneous agents at the micro level mean that shocks have lasting effects, aggregate variables containing a selective, erasable memory of the shocks experienced. This hysteresis framework provides foundations for the post-Walrasian analysis of macroeconomic systems.
Highlights
The mathematical study of hysteresis is an innovative and wide-ranging area of applied mathematics, actively pursued by engineers, scientists and mathematicians in a variety of fields and drawing on methods of nonlinear analysis, dynamical systems and control theory
The equilibrium rate y(t) will likely depend on the prehistory of the problem, an obvious example of this would be that the “equilibrium rate” at which activity would remain constant would be different if the current state was reached by a large recession than if the same state was reached by a boom period
The purpose of this paper has been to investigate the implications of relaxing some fundamental assumptions in mainstream macroeconomic theory
Summary
The mathematical study of hysteresis is an innovative and wide-ranging area of applied mathematics, actively pursued by engineers, scientists and mathematicians in a variety of fields and drawing on methods of nonlinear analysis, dynamical systems and control theory. The equilibrium rate y(t) will likely depend on the prehistory of the problem, an obvious example of this would be that the “equilibrium rate” at which activity would remain constant would be different if the current state was reached by a large recession than if the same state was reached by a boom period. The rate of change of the level of activity at a time t is proportional to the difference between the actual input variable I(t) and the equilibrium rate y(t).
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