Andrea Roventini

Macroeconomic Policy in DSGE and Agent-Based Models

The Great Recession seems to be a natural experiment for macroeconomics showing the inadequacy of the predominant theoretical framework—the New Neoclassical Synthesis—grounded on the DSGE model. In this paper, we present a critical discussion of the theoretical, empirical and political-economy pitfalls of the DSGE-based approach to policy analysis. We suggest that a more fruitful research avenue to pursue is to explore alternative theoretical paradigms, which can escape the strong theoretical requirements of neoclassical models (e.g., equilibrium, rationality, representative agent, etc.). We briefly introduce one of the most successful alternative research projects—known in the literature as agent-based computational economics (ACE)—and we present the way it has been applied to policy analysis issues. We then provide a survey of agent-based models addressing macroeconomic policy issues. Finally, we conclude by discussing the methodological status of ACE, as well as the (many) problems it raises.

Agent-based modeling of climate policy

Model-based support of climate policy is scientifically challenging because climate change involves linked physical and social systems that operate on multiple levels: local, national, and international. As a result, models must employ some strongly simplifying assumptions. The most frequently used models typically assume hyper-rational and homogenous human behavior. These ensure tractability but, as a trade-off, abstract away the effects of less-than-rational decision-making and actor heterogeneity on domestic policy effectiveness and the influence of domestic constituents on international policy agreement. In this paper, we introduce a multi-level model framework, called ENGAGE, that relaxes some common modeling assumptions by adopting an agent-based approach. ENGAGE is styled after the Putnam two-level game, in which negotiators at the international level are constrained by the heterogeneous policy preferences and power of constituents at the domestic level. We proceed to provide a detailed description and demonstration of the prototype domestic-level module. Domestic actors include firms and households who function as agents within an evolutionary representation of economic growth, energy technology, and climate change. This allows an evaluation of policies that accounts for agent decision-making and social and technological change. Ultimately, we plan to use the ENGAGE model to simulate the two-way dynamic feedback between international agreements and domestic policy outcomes. Highlights? Introduces ENGAGE, a multi-level agent-based model of international climate policy. ? Prototype linked energy-economy model with endogenous technological change. ? Supports the design of robust climate change mitigation strategies.

Fat-tail Distributions and Business-Cycle Models

Recent empirical findings suggest that macroeconomic variables are seldom normally dis- tributed. For example, the distributions of aggregate output growth-rate time series of many OECD countries are well approximated by symmetric exponential-power (EP) den- sities, with Laplace fat tails. In this work, we assess whether Real Business Cycle (RBC) and standard medium-scale New-Keynesian (NK) models are able to replicate this sta- tistical regularity. We simulate both models drawing Gaussian- vs Laplace-distributed shocks and we explore the statistical properties of simulated time series. Our results cast doubts on whether RBC and NK models are able to provide a satisfactory representation of the transmission mechanisms linking exogenous shocks to macroeconomic dynamics.

Are Business Cycles All Alike? A Bandpass Filter Analysis of the Italian and US Cycles

In this paper, we perform an empirical comparison of Italian and US business cycles. After filtering the time series of the main macroeconomic variables of the two countries, through an approximate bandpass filter, we analyze the cross-correlations between each filtered variable and the filtered GDP, indicator of the business cycle. We find heterogeneity in business cycle dynamics as regards variables related to the industrial structure (see exports, investment in construction), and to the organization of markets (e.g. stock prices, private consumption), interpreted as effects of local path-dependencies. Cyclical components of prices, labor market variables, and monetary policy indicators are almost invariant across economies, reflecting common international drivers, such as the Federal Reserve Bank monetary policy, and international oil prices.

Taming macroeconomic instability: Monetary and macro prudential policy interactions in an agent-based model

We develop an agent-based model to study the macroeconomic impact of alternative macro-prudential regulations and their possible interactions with different monetary policy rules. The aim is to shed light on the most appropriate policy mix to achieve the resilience of the banking sector and foster macroeconomic stability. Simulation results show that a triple-mandate Taylor rule, focused on output gap, inflation and credit growth, and a Basel III prudential regulation is the best policy mix to improve the stability of the banking sector and smooth output fluctuations. Moreover, we consider the different levers of Basel III and their combinations. We find that minimum capital requirements and counter-cyclical capital buffers allow to achieve results close to the Basel III first-best with a much more simplified regulatory framework. Finally, the components of Basel III are non-additive: the inclusion of an additional lever does not always improve the performance of the macro-prudential regulation.

Fat-tail distributions and business-cycle models

Recent empirical findings suggest that macroeconomic variables are seldom normally distributed. For example, the distributions of aggregate output growth-rate time series of many OECD countries are well approximated by symmetric exponential-power (EP) densities, with Laplace fat tails. In this work, we assess whether Real Business Cycle (RBC) and standard medium-scale New-Keynesian (NK) models are able to replicate this statistical regularity. We simulate both models drawing Gaussian- vs Laplace-distributed shocks and we explore the statistical properties of simulated time series. Our results cast doubts on whether RBC and NK models are able to provide a satisfactory representation of the transmission mechanisms linking exogenous shocks to macroeconomic dynamics.

Macroeconomic Policy in DSGE and Agent-Based Models Redux: New Developments and Challenges Ahead

The Great Recession seems to be a natural experiment for economic analysis, in that it has shown the inadequacy of the predominant theoretical framework | the New Neoclassical Synthesis (NNS) | grounded on the DSGE model. In this paper, we present a critical discussion of the theoretical, empirical and political-economy pitfalls of the DSGE-based approach to policy analysis. We suggest that a more fruitful research avenue should escape the strong theoretical requirements of NNS models (e.g., equilibrium, rationality, representative agent, etc.) and consider the economy as a complex evolving system, i.e. as an ecology populated by heterogeneous agents, whose far-from-equilibrium interactions continuously change the structure of the system. This is indeed the methodological core of agent-based computational economics (ACE), which is presented in this paper. We also discuss how ACE has been applied to policy analysis issues, and we provide a survey of macroeconomic policy applications (fiscal and monetary policy, bank regulation, labor market structural reforms and climate change interventions). Finally, we conclude by discussing the methodological status of ACE, as well as the problems it raises.

Inequality and Macroeconomic Factors: A Time-Series Analysis for a Set of OECD Countries

In this work, we study the short- and long-run properties of different inequality series vis-a-vis the most important macroeconomic series for a set of OECD countries. We employ standard tools of time series macro-econometrics (e.g. stationarity tests, detrending, comovements analysis, Granger-causality tests, etc.) in order to possible uncover some fresh stylized facts about inequality. The broad picture emerging from our empirical analysis is one where some common patterns coexist together with several country specificities. More specifically, most of inequality series are not stationary; long-run equilibrium relationships between share prices and inequality emerge in Canada, the U.S., and the U.K.; at the business cycle frequencies, most inequality series are counter-cyclical (with the exception of Germany), negatively correlated with inflation and positively correlated with unemployment; consumption inequality is counter-cyclical in Europe, whereas pro-cyclical in English-speaking countries; the comovements between inequality series and government consumption appear to be heavily dependent on the institutions of the countries under analysis; Granger-causality tests suggest that in some cases inequality Granger-causes output.

Rational Heuristics? Expectations and Behaviors in Evolving Economies with Heterogeneous Interacting Agents

We analyze the individual and macroeconomic impacts of heterogeneous expectations and action rules within an agent-based model populated by heterogeneous, interacting firms. Agents have to cope with a complex evolving economy characterized by deep uncertainty resulting from technical change, imperfect information and coordination hurdles. In these circumstances, we find that neither individual nor macroeconomic dynamics improve when agents replace myopic expectations with less naive learning rules. In fact, more sophisticated, e.g. recursive least squares (RLS) expectations produce less accurate individual forecasts and also considerably worsen the performance of the economy. Finally, we experiment with agents that adjust simply to technological shocks, and we show that individual and aggregate performances dramatically degrade. Our results suggest that fast and frugal robust heuristics are not a second-best option: rather they are “rational” in macroeconomic environments with heterogeneous, interacting agents and changing “fundamentals”.

When More Flexibility Yields More Fragility: The Microfoundations of Keynesian Aggregate Unemployment

Wages are an element of cost crucially affecting the competitiveness of individual firms. But the wage bill is also a crucial element of aggregate demand. Hence it could be that more “flexible�? and fluid labour markets, while allowing for faster inter-firm reallocation of labour, may also render the whole economic system more fragile, more prone to recession, more volatile. In this work we investigate some conditions under which such a conjecture applies. The paper presents an agent-based model that investigates the effects of two “archetypes of capitalism�?, in terms of regimes of labour governance – defined by the mechanisms of wage determination, firing, labour protection and productivity gains sharing – upon (i) labour market regularities and (ii) macroeconomic dynamics (long-term rates of growth, GDP fluctuations, unemployment rates, inequality, etc..). The model is built upon the “Keynes meets Schumpeter�? family of models (Dosi et al., 2010), explicitly incorporating different microfounded labour market regimes. Our results show that seemingly more rigid labour markets and labour relations are conducive to coordination successes with higher and smoother growth.