2016/24 | LEM Working Paper Series | ||||||||||||||||
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No Man Is an Island: The Impact of Heterogeneity and Local Interactions on Macroeconomic Dynamics |
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Mattia Guerini, Mauro Napoletano and Andrea Roventini |
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Keywords | |||||||||||||||||
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Agent-Based Model, Local Interactions, Heterogeneous Agents, DSGE Model
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JEL Classifications | |||||||||||||||||
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E03, E32, E37
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Abstract | |||||||||||||||||
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We develop an agent-based model in which heterogeneous firms and
households interact in labor and good markets according to centralized
or decentralized search and matching protocols. As the model has a
deterministic backbone and a full-employment equilibrium, it can be
directly compared to Dynamic Stochastic General Equilibrium (DSGE)
models. We study the effects of negative productivity shocks by way of
impulse-response functions (IRF). Simulation results show that when
search and matching are centralized, the economy is always able to
return to the full employment equilibrium and IRFs are similar to
those generated by DSGE models. However, when search and matching are
local, coordination failures emerge and the economy persistently
deviates from full employment. Moreover, agents display persistent
heterogeneity. Our results suggest that macroeconomic models should
explicitly account for agents' heterogeneity and direct interactions.
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