A micro-meso-macro perspective on the methodology of evolutionary economics: integrating history, simulation and econometrics

Applied economics has long been dominated by multiple regression techniques. In this regard, econometrics has tended to have a narrower focus than, for example, psychometrics in psychology. Over the last two decades, the simulation and calibration approach to modeling has become more popular as an alternative to traditional econometric strategies. However, in contrast to the well-developed methodologies that now exist in econometrics, simulation/calibration remains exploratory and provisional, both as an explanatory and as a predictive modelling technique although clear progress has recently been made in this regard (see Brenner and Werker (2006)). In this paper, we suggest an approach that can usefully integrate both of these modelling strategies into a coherent evolutionary economic methodology.

A Model of Firm Behaviour with Equity Constraints and Bankruptcy Costs

Based on Greenwald and Stiglitz (1988,1990), this work explores a simple model of microeconomic behaviour which incorporates the impact of capital markets imperfections generated by asymmetric information on firms’ optimal investment decision rules. In particular, this paper analyses how a specific form of asymmetric information problem (adverse selection) may imply lower investment than otherwise through the reduction of the firms’ ability to raise external financing – either in the form of credit rationing or the ‘voluntary’ reduction of firms’ borrowing activity. The natural follow-up to this work would be to formally show how a loan market where both contractual interest rates and loan sizes are (a priori) variable may be characterised by a credit rationing equilibrium.Asymmetric Information, Firm Behaviour, Investment Financing

Microeconomic Behavior of Agents in a Credit-Output Market in an Agricultural Setting

Rural agents engage in interlocking market transactions to minimize costs due to underdevelopment of rural markets. This study aims to model the economic behavior of agents in a credit-output market. Results indicate the prevalence of high interest rates in developed areas. Where income is low, transaction costs are high and the market is segmented, informal lenders are useful on efficiency grounds. Hence, the first-best solution appears to be augmenting farmer’s income.economic/development modelling, income, rural sector, credit market, transaction cost

Non-Financial Corporate Risk Management and Exchange Rate Volatility in Latin America

Foreign exchange, Financial markets, International investments, Capital movements

Financial fragility in a basic agent-based model

A simple agent-based model of business units lending money to one another is sufficient to understand on what conditions avalanches of bankruptcies may arise. The model highlights the consequences of specialisation into money lending as well as the impact of preferential lending relations

CONSUMER PRICE SETTING IN ITALY

This paper investigates the microeconomic behaviour of consumer prices in Italy using the individual price records underlying the Italian CPI dataset collected by Istat. We discuss how to analyse price stickiness using such a detailed database and compute a quantitative measure of the unconditional degree of price rigidity in the Italian economy. The analysis focuses on the monthly frequency of price changes and on the duration of price spells, with a sectoral breakdown as well as with a classification by type of outlet. Prices are in general found to be rather sticky, remaining unchanged on average for around 10 months; price spells last longer for non-energy industrial goods and services, much less for energy products. Prices are revised more frequently upwards than downwards, while the size of price changes is quite symmetric. Price st ickiness is found to be less marked in large modern stores than in smaller traditional shops. Price changes display considerable synchronisation, in particular in the services sector. The average frequency of price changes and the probability of observing a price change over time and across items are positively related to headline inflation and increases in VAT rates and negatively related to the share of attractive prices. These findings are consistent with the ones reported in similar national studies for other countries of the euro area, which were conducted by the National Central Banks within the Eurosystem Inflation Persistence Network.consumer prices, nominal rigidity, frequency of price change

Aluminium market and the macroeconomy

We propose and test a structural model of the interaction between the aluminium market and the macroeconomy incorporating the rational expectations hypothesis. Based on a competition à la Cournot, our model predicts that aluminium spot price and inventories will respond to macroeconomic shocks to line up supply to the demand level. The model also includes incomplete adjustments to shocks that occur near the delivery date of futures contracts with the implication of a likely high persistence in the aluminium spot price. Estimation results show that the aluminium price is significantly affected by the real exchange rate, while the influence of the real interest rate is small. We argue that this result is largely expected once we consider the peculiar features of the aluminium market. Further support to this view is provided by the large persistence of the aluminium price response to its own shock and by the negligible contribution of stockholdings innovations to the price forecast error variance. Finally, macroeconomic shocks explain on the whole a relevant share of the aluminium market variables forecast error variance.Metal commodities, Monetary transmission mechanism, Rational Expectations Hypothesis test, SVAR

Corporate Governance, Crony capitalism and Economic Crisis: Should the US Business Model replace the Asian Way of 'Doing Business'?

This paper considers the Greenspan/Summers/IMF (GSI) argument that the Asian way of doing business was the deep cause of the Asian crisis. The IMF reform programme for the crisis-affected Asian countries suggested they should abandon the Asian business model and adopt the US corporate model. The main findings are: a) contrary to GSI doctrine, poor corporate governance and lack of competition are not common characteristics of the Asian business model; b) that the stock-market based US business model has severe limitations for developing country corporations, not least because of imperfect share prices and the imperfect market for corporate control.Asian and US corporate models; stock markets; Asian crisis

A Model of Primary and Secondary Waves in Business Cycles

Schumpeter maintained that oscillations of macroeconomic variables are only the “secondary wave” of business cycles, a reflex of more fundamental “primary waves” at the microeconomic level caused by the innovating activity of entrepreneurs. Blending Schumpeter’s concern for innovation with Keynes’ concern for uncertainty and expectation formation, this article focuses on the behaviour ofentrepreneurs in front of the uncertainty caused by innovation. Entrepreneurs’ behaviour is reconstructed modelling the functioning of their cognitive processes when technological novelties appear. The avalanche process that generates a macroeconomic wave out of the microeconomic behaviour of single entrepreneurs is described as a selforganisation phenomenon. A rudimentary business cycle model is set forth, its qualitative behaviour is analysed by means of a potential function, and simulations are presented. While the basic model produces oscillations only because new technologies force entrepreneurs to change their confidence in the future, a more sophisticated version considers the effect of labour force, too