Macrodynamic Model Research Articles

Adaptive agents may be smarter than you think: unbiasedness in adaptive expectations

Abstract Experimental evidence shows that human subjects frequently rely on adaptive heuristics to form expectations but their forecasting performance in the lab is not as inadequate as assumed in macroeconomic theory. In this paper, we use an agent-based model (ABM) to show that the average forecasting error is indeed close to zero even in a complex environment if we assume that agents augment the canonical adaptive algorithm with a Belief Correction term which takes into account the previous trend of the variable of interest. We investigate the reasons for this result using a streamlined nonlinear macro-dynamic model that captures the essence of the ABM.

Functional Distribution of Income, Floating Exchange Rates and Inflation Targets in a Macrodynamic Model

Functional Distribution of Income, Floating Exchange Rates and Inflation Targets in a Macrodynamic Model

A Mathematical Analysis of a MMT Type Coordinated Fiscal and Monetary Stabilization Policy in a Dynamic Keynesian Model

We study the dynamic properties of the coordinated fiscal and monetary stabilization policy in a modern monetary theory (MMT) type macrodynamic model in detail using advanced mathematical techniques and numerical simulations. The dynamic stability, instability of equilibrium points, and questions of qualitative changes at bifurcation points are investigated both mathematically and numerically. Finally, the economic implications of the analysis of this MMT type dynamic model are discussed in contrast to the more orthodox type of Keynesian stabilization policy mix model.

Endogenous labor migration and remittances: Macroeconomic and welfare consequences

This paper develops a macrodynamic model of two small economies – a host country and a labor-exporting developing country – to address the impact of migrant workers and remittances on the two economies. It endogenizes the migration decision as part of the intertemporal utility maximization of households in the developing economy. This setup captures the dynamic process of migration, in which evolving circumstances may lead to fundamental differences from those based on treating remittances as exogenous. Extensive numerical simulations consider two diverse sources of structural change that impinge directly on the migration-remittance relationship. In both cases the long-run impact on the remittance-GDP ratio differs markedly from the immediate response, primarily as a consequence of the impact on the evolving migration during the transition. The welfare consequences of the different constituents – domestic residents, migrant workers, and host economy native workers – are considered. Alternative tax policies to offset effects, deemed adverse, are also discussed.

Simulation and forecasting models of COVID-19 taking into account spatio-temporal dynamic characteristics: A review.

The COVID-19 epidemic has caused more than 6.4 million deaths to date and has become a hot topic of interest in different disciplines. According to bibliometric analysis, more than 340,000 articles have been published on the COVID-19 epidemic from the beginning of the epidemic until recently. Modeling infectious diseases can provide critical planning and analytical tools for outbreak control and public health research, especially from a spatio-temporal perspective. However, there has not been a comprehensive review of the developing process of spatio-temporal dynamic models. Therefore, the aim of this study is to provide a comprehensive review of these spatio-temporal dynamic models for dealing with COVID-19, focusing on the different model scales. We first summarized several data used in the spatio-temporal modeling of the COVID-19, and then, through literature review and summary, we found that the existing COVID-19 spatio-temporal models can be divided into two categories: macro-dynamic models and micro-dynamic models. Typical representatives of these two types of models are compartmental and metapopulation models, cellular automata (CA), and agent-based models (ABM). Our results show that the modeling results are not accurate enough due to the unavailability of the fine-grained dataset of COVID-19. Furthermore, although many models have been developed, many of them focus on short-term prediction of disease outbreaks and lack medium- and long-term predictions. Therefore, future research needs to integrate macroscopic and microscopic models to build adaptive spatio-temporal dynamic simulation models for the medium and long term (from months to years) and to make sound inferences and recommendations about epidemic development in the context of medical discoveries, which will be the next phase of new challenges and trends to be addressed. In addition, there is still a gap in research on collecting fine-grained spatial-temporal big data based on cloud platforms and crowdsourcing technologies to establishing world model to battle the epidemic.

Financial structure, cycle, and instability

The subprime loan mortgage crisis has revived scholarly interest in Minsky’s financial instability hypothesis. The related mathematical models present two types of Minskian financial structures. We construct macrodynamic models that consider both structures and discuss financial instability and cycles. We also demonstrate that one of the financial cycles occurs when a real factor stabilizes the economy. The burden of interest-bearing debt is an important determinant of the cycle. We posit that the escalating financial fragility in this cycle is a more appropriate interpretation of the Minskian financial structure that refers to hedging, speculative and Ponzi behaviors. We further demonstrate that another financial structure destabilizes the economy. If the instability occurs at the point of fragility, then the economy may deteriorate into financial crisis. Fragility then becomes instability.

Moving dynamics beyond business cycles: Jan Tinbergen’s first macrodynamic model (1934–1936)

As soon as 1932, Jan Tinbergen proposed an explanation of the Great Depression based on a specific treatment of unstable processes and multiple equilibria. After his involvement in the early meetings of the Econometric Society, he worked on different dynamic models accounting for this instability. In 1934, he built a macrodynamic model generating new types of economic movements that did not return to a stationary state. This led him in 1936 to consider the possibility of having two equilibria, with damped or self-sustained cycles around the high equilibrium and a collapse around the low equilibrium. Tinbergen saw these models, with reference to Irving Fisher’s 1933 paper, as a way to interpret the potential of a crisis to trigger the collapse of the economy. In the end, it turns out that Tinbergen managed to extend the perspective for the study of the business cycle mechanism to non cyclical behaviours which, strikingly, remains almost totally ignored in most histories of macroeconomics and econometrics.

Is capacity utilization variable in the long run? An agent-based sectoral approach to modeling hysteresis in the normal rate of capacity utilization

Post Keynesian macrodynamic models make various assumptions about the normal rate of capacity utilization. Those rooted in the Classical and neo-Keynesian traditions assume the normal rate is fixed, whereas Kaleckian models treat it as a variable that is endogenous to the actual rate of capacity utilization. This paper contributes to the debate about the normal rate of capacity utilization by developing a model of strong or genuine hysteresis, in which firms make discrete decisions about the normal rate depending on the degree of uncertainty about demand conditions. An agent-based model based on empirical analysis of 25 sectors of the US economy is used to show that hysteresis can cause variation in the normal rate of capacity utilization within a subset of the range of observed variation in the actual capacity utilization rate. This suggests that the economy exhibits both constancy and (endogenous) variability in the normal rate of utilization over different ranges of variation in the actual rate. More broadly speaking, the genuine hysteresis model is shown to provide the basis for a synthesis of Post Keynesian macrodynamics that draws on both the Classical/neo-Keynesian and Kaleckian modeling traditions.

Macroeconomic impacts of remittances: A two-country, two-sector model

We examine the impacts of remittances on foreign direct investment and the development of developing countries using a macro-dynamic model of two small open economies—an advanced economy and a developing country. We incorporate a two-sector framework for the latter: traditional non-traded and foreign capital dependent traded sectors while introducing a collateral effect of remittances. The most important feature of the model is that remittances come from two sources: temporary migrant workers and permanent immigrants, and they are allocated between consumption and domestic investment through the household’s utility maximization. The results from extensive calibration exercises show that remittances in the presence of labor migration hurt the traded sector of the developing economy, leading to a contraction in the aggregate output. Albeit to a lesser extent, the contraction persists even with the expansionary impacts of remittances through the collateral effect. In addition, the migration policy of the developing countries can weaken other development efforts, giving rise to a phenomenon known as a migration-remittance trap.

Financial Structure and Instability in an Open Economy

The subprime loan mortgage crisis has revived scholarly interest in Minsky’s financial instability hypothesis. The related mathematical models present two types of Minskian financial structures, which we identify as the lenders’ risk type (LR) and the hedge, speculative and Ponzi type (HSP). We construct macrodynamic models in a fixed and floating exchange rate system which considers both the LR and HSP financial structures. We examine the effects of international capital mobility and international lenders’ risks and demonstrate the significance of the LR and HSP financial structures in the fixed and floating exchange rate system. We emphasize the significance of stable financial structures in order to stabilize dynamic systems in an open economy.

Dynamic model of macro crowd merging based on abnormal pedestrian posture

Crowd merging is a complex process, and any sudden external or internal disturbance will destroy the stability of the crowd. The occurrence of abnormal behavior will affect the crowd flow process and inevitably affect the stability of the crowd flow system. The position information of the joint points is obtained through the OpenPose algorithm, and the kinematics characteristics of each node are studied. It is judged whether the number of pedestrians in the crowd and the scale of the building scene are greater than the empirical setting value based on engineering statistical data and expert experience. When the number of pedestrians is more than 2,000 and the total area of the passage is more than 2,000 square meters, the appropriate macro-dynamic model is selected. The Aw-Rascle (AR) fluid dynamics model is selected in this study. The joint point information obtained through the OpenPose is combined with the macroscopic fluid dynamics model to construct a macroscopic crowd flow dynamics model based on the pedestrian's abnormal posture.

The importance of multiple equilibria for economic policy in Jan Tinbergen’s early works

This article provides a comprehensive view of Tinbergen’s macrodynamic models developed during the 1930s and early 1940s, showing how the economist’s concerns evolved from problems of instability to the idea of reaching higher positions of equilibria. Tinbergen built these ideas in the framework of nonlinear models, which he used to shed a new light on several policy problems: wage changes, government expenditure and its relation to pump-priming, and the regulation of purchasing power. This work on multiple equilibria was complementary to the macroeconometric models developed in the late 1930s, where linearity was justified by the assumption of small shocks.

Migrant Labor and Remittances: Macroeconomic Consequences and Policy Responses

Many developing countries experiencing poor domestic economic performance view migrant labor as an alternative. We employ a macrodynamic model of two small open economies—a host country and a labor-exporting developing country—to address this issue. We analyze how both economies are impacted by alternative tax policies, structural changes occurring in the two economies, and plausible fiscal policy responses. The most important feature of the model is that remittances are endogenized by being linked to the household members’ decisions to migrate. Extensive numerical simulations provide important implications for both fiscal and migration policies and address important questions regarding the current efforts put forward by governments of several developing countries to encourage migrant labor.

Monetary Policy Under Steindlian Mark-up Dynamics

ABSTRACT We formulate a macrodynamic model of interaction between a post-Keynesian investment function with endogenous capacity utilization and pro-cyclical mark-up over wage costs in a demand-constrained closed economy. The main objective of the study is to examine whether, in the absence of effective collective bargaining by the workers, monetary policy can resolve class conflict and maintain social stability. We consider a modified version of the counter-cyclical Taylor-type interest-rate rules that targets income distribution through the rate of capacity utilization. We explore the extent to which a combination of pro-cyclical mark-up dynamics and counter-cyclical interest-rate rules can stabilize potentially unstable investment dynamics. We also examine the effectiveness of monetary policy in the form of interest-rate rules in stabilizing output and income distribution.

Policy to promote overseas migrant work: A macro-dynamic framework

Could the policy to promote overseas migrant work be to blame for the sluggish development in some South Asian countries? I employ a macro-dynamic model of two small open economies to examine the policy of the developing, labor-exporting country to promote migrant work in a rich, labor-importing economy. The results from calibration exercises show that remittances received from migrant workers are expansionary through its collateral impact. However, the loss of labor due to the policy hinders capital accumulation in the poor country; as a result, it reduces income in the long run. Welfare, however, increases due to the increase in consumption stimulated by the increase in remittances. The impacts are more pronounced for a poorer country such as Nepal whose remittance receipts amounted to more than 30 percent of GDP.

Stabilizing and destabilizing mechanisms: A new perspective to understand business cycles

Economists believe that economic fluctuations can be smoothed by stabilization mechanisms, such as price adjustment, embedded in the economy. While price adjustment can be seen as a stabilization mechanism, are there mechanisms that can destabilize an economy? We find that as early as 1939, Harrod discussed a destabilization mechanism, the firm's investment adjustment, illustrated in his knife-edge puzzle. We build a macro-dynamic model with investment and price as the core macroeconomic variables. Our analysis shows that the interaction between the stabilization mechanism (price adjustment) and the destabilization mechanism (investment adjustment) generates fluctuations and cycles. However, due to price stickiness, the price adjustment mechanism may not be enough to stabilize the economy. In this case, a government stabilization policy is necessary for further stabilization. As this paper also addresses the microfoundations of Keynesian quantity theory, including the choice of output and investment in optimization, it can be related to traditional Keynesian economics, with a new perspective to understand business cycles.

HETEROGENEITY IN INFLATION EXPECTATIONS AND MACROECONOMIC DYNAMICS UNDER EVOLUTIONARILY SATISFICING LEARNING

Drawing on the empirical evidence that heterogeneity in inflation expectations is persistent and endogenously time-varying, we embed two inflation forecasting strategies—one based on costly ex ante perfect foresight, and the second based on costless ex ante extrapolative trend-following—in a macrodynamic model. Drawing also on the empirical evidence that inflation forecast errors may have to exceed some threshold before agents abandon their previously selected forecasting strategy, we describe agents as switching between forecasting strategies according to evolutionarily satisficing learning. Convergence to a long-run equilibrium consistent with output growth, unemployment and inflation at their natural levels may be achieved even if heterogeneity in inflation forecasting strategies (with predominance of the extrapolative foresight strategy) is an attractor of an evolutionarily satisficing dynamic perturbed by mutant agents. Thus, in keeping with the empirical evidence, heterogeneity in strategies to form inflation expectations (with prevalence of bounded rationality) can be a stable long-run equilibrium.

Structural change and financial instability in the US economy

The international financial crisis triggered by the 2007 subprime loan crisis in the US continues to casts a shadow over the world economy and has prompted renewed attention to the financial instability hypothesis proposed by the heterodox economist Hyman P. Minsky. This study presents a macrodynamic model that examines the structural changes and the instability of confidence affecting a dynamic system. We demonstrate that an unstable economic structure and a high instability of confidence make the system unstable. In addition, we conduct a vector autoregression (VAR) analysis to examine structural changes in the US economy, particularly in the late 1990s. Our analysis strongly indicates that the US economic structure has been transubstantiated since the late 1990s. The instability of confidence was very high after the subprime loan crisis and has directly affected investment since then.

Endogenously heterogeneous inflation expectations and monetary policy

This study adopts insights from Heterogeneous Agent Models (HAM) in order to formalize Post Keynesian insights and further develop heterodox macroeconomics. We formulate a macrodynamic model consisting of a standard Post Keynesian investment function and conflict inflation, resulting from workers and capitalists making conflicting claims over their shares in output. The central bank targets the inflation rate by employing the nominal rate of interest as an instrument. However, in a departure from standard Post Keynesian literature, expectations about inflation are endogenously heterogeneous. An endogenously determined fraction of the agents expects the inflation target of the central bank to prevail, while the rest of the agents are trend-followers. The proportion of trend followers depends directly on the proportionate deviation of the actual rate of inflation from the target rate. We examine the stability of the model and discuss some of its dynamic properties. We find that even along the steady-state neither class is able to achieve its desired share. Further, due to the endogenously heterogeneous nature of inflation expectations, any large shock to the system might destabilize it. We reexamine the effectiveness of a monetary policy that relies solely on inflation targeting in this context.

Investment behaviour and “bull & bear” dynamics: modelling real and stock market interactions

In this article, we develop a simple behavioural macrodynamic model in continuous-time with the purpose of investigating the interaction of the real economy and the financial markets. Building on Westerhoff (Discret Dyn Nat Soc, 2012), we improve the specification of aggregate demand by distinguishing between consumption and investment expenditure and assuming that the latter is determined by the flexible accelerator principle. We remove the ad hoc nonlinearity in the fundamentalist behavioural rule and allow the composition of the population between chartists and fundamentalists to be endogenously determined. The resulting nonlinear dynamic systems are shown to generate various dynamic regimes, among which the coexistence of periodic attractors with interesting economic implications. Endogenous investment and stock market dynamics emerge, procyclical to each other, reflecting the interaction of induced investment with alternating waves in speculators’ sentiments. We show that a strong investment accelerator might be a crucial force generating fluctuations that, on the one hand, are transmitted and amplified by chartists and, on the other hand, are contained by fundamentalists.