2016/17 | LEM Working Paper Series | ||||||||||||||||
Macroeconomic Policy in DSGE and Agent-Based Models Redux: New Developments and Challenges Ahead |
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Giorgio Fagiolo and Andrea Roventini |
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Keywords | |||||||||||||||||
Economic Policy, New Neoclassical Synthesis, New Keynesian Models, DSGE
Models, Agent-Based Computational Economics, Agent-Based Models, Complexity Theory,
Great Recession, Crisis
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JEL Classifications | |||||||||||||||||
B41, B50, E32, E52
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Abstract | |||||||||||||||||
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 heterogenous
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.
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