Bringing Macroeconomics into the Lab

This paper reviews experiments in macroeconomics, pointing out the theoretical justifications, the strengths and weaknesses of this approach. We identify two broad classes of experiments: general equilibrium and partial equilibrium experiments, and emphasize the idea of theory testing that is behind these. A large number of macroeconomic issues have been analyzed in the laboratory spanning from monetary economics to fiscal policy, from international trade and finance, to growth and macroeconomic imperfections. In a large number of cases results give support to the theories tested. We also highlight that experimental macroeconomics has increased the number of tools available to experimentalists.macroeconomics, experiments.

Bringing Macroeconomics into the Lab.

This paper reviews experiments in macroeconomics, pointing out the theoretical justifications, the strengths and weaknesses of this approach. We identify two broad classes of experiments: general equilibrium and partial equilibrium experiments, and emphasize the idea of theory testing that is behind these. A large number of macroeconomic issues have been analyzed in the laboratory spanning from monetary economics to fiscal policy, from international trade and finance, to growth and macroeconomic imperfections. In a large number of cases results give support to the theories tested. We also highlight that experimental macroeconomics has increased the number of tools available to experimentalists.Macroeconomics; experiments

Monetary Policy and Dark Corners in a stylized Agent-Based Model

We extend in a minimal way the stylized model introduced in in "Tipping Points in Macroeconomic Agent Based Models" [JEDC 50, 29-61 (2015)], with the aim of investigating the role and efficacy of monetary policy of a `Central Bank' that sets the interest rate such as to steer the economy towards a prescribed inflation and employment level. Our major finding is that provided its policy is not too aggressive (in a sense detailed in the paper) the Central Bank is successful in achieving its goals. However, the existence of different equilibrium states of the economy, separated by phase boundaries (or "dark corners"), can cause the monetary policy itself to trigger instabilities and be counter-productive. In other words, the Central Bank must navigate in a narrow window: too little is not enough, too much leads to instabilities and wildly oscillating economies. This conclusion strongly contrasts with the prediction of DSGE models.Comment: Contribution to the CRISIS project, 25 pages, 21 figures, pseudo-code of the model, revised and improved versio

Public output and private decisions : conceptual issues in the evaluation of Government activities and their implications for fiscal policy

In this essay, the author explores theoretical concepts behind the current debate on government growth, public sector inefficiency, and the role of fiscal policy with a view to raising the most important issues relevant for fiscal policy. He examines theories of public sector growth, the evaluation of benefits from government spending, and the response of the private sector to government activities. Three principal reasons have been suggested to explain public sector growth: conscious government choices, political pressure from interest groups, and the self-interest of bureaucracies. One may ask: is the growth of the public sector a response to public demand or the result of government waste and inefficiency? In terms of the agent-principal theory, bureaucrats who are supposed to serve as agents for citizens may not necessarily do so - which is where waste comes in. If bureaucrats are interested in the nonpecuniary benefits of their bureaus, they will have an incentive to maximize their activities and budgetary allocation rather than their operating efficiency. In discussing the evaluation of public programs, the author focuses on the"true"benefits, as perceived by citizens. Would a well-to-do citizen, who could afford private security guards, make the same evaluation about public security that a poor citizen would make? In general, what considerations affect a person's desire for a given amount of public spending, and what are the important parameters that analysts should take into account in their investigation? The author also explores the issues behind the private sector's response to government activities and argues against a mechanistic approach to the interaction between the private and public sector. Unless decisionmakers are relatively certain about how citizens evaluate government actions, citizens may respond in a way that nullifies the government action. The author concludes that more empirical work is needed on measuring citizens's response to public sector activities. And fiscal policy, especially on expenditures, should be modeled on a disaggregated basis to isolate hypotheses about potential private sector responses to individual public programs.National Governance,Economic Stabilization,Economic Theory&Research,Environmental Economics&Policies,Banks&Banking Reform

Income Distribution, Credit and Fiscal Policies in an Agent-Based Keynesian Model

This work studies the interactions between income distribution and monetary and fiscal policies in terms of ensuing dynamics of macro variables (GDP growth, unemployment, etc.) on the grounds of an agent-based Keynesian model. The direct ancestor of this work is the "Keynes meeting Schumpeter" formalism presented in Dosi et al. (2010). To that model, we add a banking sector and a monetary authority setting interest rates and credit lending conditions. The model combines Keynesian mechanisms of demand generation, a "Schumpeterian" innovation-fueled process of growth and Minskian credit dynamics. The robustness of the model is checked against its capability to jointly account for a large set of empirical regularities both at the micro level and at the macro one. The model is able to catch salient features underlying the current as well as previous recessions, the impact of financial factors and the role in them of income distribution. We find that different income distribution regimes heavily affect macroeconomic performance: more unequal economies are exposed to more severe business cycles fluctuations, higher unemployment rates, and higher probability of crises. On the policy side, fiscal policies do not only dampen business cycles, reduce unemployment and the likelihood of experiencing a huge crisis. In some circumstances they also affect positively long-term growth. Further, the more income distribution is skewed toward profits, the greater the effects of fiscal policies. About monetary policy, we find a strong non-linearity in the way interest rates affect macroeconomic dynamics: in one "regime" with low rates, changes in interest rates are ineffective up to a threshold beyond which increasing the interest rate implies smaller output growth rates and larger output volatility, unemployment and likelihood of crises.agent-based Keynesian models, multiple equilibria, fiscal and monetary policies, income distribution, transmission mechanisms, credit constraints

Income Distribution, Credit and Fiscal Policies in an Agent-Based Keynesian Model

This work studies the interactions between income distribution and monetary and fiscal policies in terms of ensuing dynamics of macro variables (GDP growth, unemployment, etc.) on the grounds of an agent-based Keynesian model. The direct ancestor of this work is the "Keynes meeting Schumpeter" formalism presented in Dosi et al. (2010). To that model, we add a banking sector and a monetary authority setting interest rates and credit lending conditions. The model combines Keynesian mechanisms of demand generation, a "Schumpeterian" innovation-fueled process of growth and Minskian credit dynamics. The robustness of the model is checked against its capability to jointly account for a large set of empirical regularities both at the micro level and at the macro one. The model is able to catch salient features underlying the current as well as previous recessions, the impact of financial factors and the role in them of income distribution. We find that different income distribution regimes heavily affect macroeconomic performance: more unequal economies are exposed to more severe business cycles fluctuations, higher unemployment rates, and higher probability of crises. On the policy side, fiscal policies do not only dampen business cycles, reduce unemployment and the likelihood of experiencing a huge crisis. In some circumstances they also affect positively long-term growth. Further, the more income distribution is skewed toward profits, the greater the effects of fiscal policies. About monetary policy, we find a strong non-linearity in the way interest rates affect macroeconomic dynamics: in one "regime" with low rates, changes in interest rates are ineffective up to a threshold beyond which increasing the interest rate implies smaller output growth rates and larger output volatility, unemployment and likelihood of crises.agent-based Keynesian models, multiple equilibria, fiscal and monetary policies, income distribution, transmission mechanisms, credit constraints

Adaptive microfoundations for emergent macroeconomics

In this paper we present the basics of a research program aimed at providing microfoundations to macroeconomic theory on the basis of computational agentbased adaptive descriptions of individual behavior. To exemplify our proposal, a simple prototype model of decentralized multi-market transactions is offered. We show that a very simple agent-based computational laboratory can challenge more structured dynamic stochastic general equilibrium models in mimicking comovements over the business cycle.Microfoundations of macroeconomics, Agent-based economics, Adaptive behavior

Reflections on Modern Macroeconomics: Can We Travel Along a Safer Road?

In this paper we sketch some reflections on the pitfalls and inconsistencies of the research program - currently dominant among the profession - aimed at providing microfoundations to macroeconomics along a Walrasian perspective. We argue that such a methodological approach constitutes an unsatisfactory answer to a well-posed research question, and that alternative promising routes have been long mapped out but only recently explored. In particular, we discuss a recent agent-based, truly non-Walrasian macroeconomic model, and we use it to envisage new challenges for future research.Comment: Latex2e v1.6; 17 pages with 4 figures; for inclusion in the APFA5 Proceeding

The split personality of prudence in the unfolding political economy of New Labour

This article focuses on the economic ideas which underpin New Labour's two very different appeals to the notion of prudence. The first treats prudence as a macroeconomic phenomenon, drawing upon the work of the 'time consistency' theorists of the 1970s. It dominated the Party's economic policy-making until the end of the first term in Government, emphasising the need for extreme vigilance on matters of public spending. The second treats prudence as a microeconomic phenomenon, drawing upon the eighteenth-century work of Adam Smith. It has become dominant since the start of the second term, emphasising the need to encourage the savings habit more widely within society. The shift in priority from the macroeconomic to the microeconomic understanding comes on the back of New Labour's own growing imprudence in time consistency terms. The Government has incentivised private savings at the same time as it has become increasingly reluctant to be a saver itself