Volume 16, Issue 4 - Interacting Agents and Nonlinear Dynamics in Macroeconomics

The selected papers collected in this special issue were presented at the “Interacting agents and nonlinear dynamics in macroeconomics” workshop organized by Marji Lines , Sebastiano Manzan, and Frank Westerhoff which was held at the University of Udine, Udine (Italy), on June 9-11, 2010. The papers represent a wide range of recent approaches that assume heterogeneous agents to explain macroeconomic dynamics.

A plethora of models of learning has been developed and studied in macro-economic models in recent years. In this paper we will try to discriminate between these learning models by running laboratory experiments with incentivized human subjects. Participants predict inflation rates for 50 successive periods in a standard overlapping generations model and are rewarded on the basis of their forecasting accuracy. The information set for each participant contains the past inflation rates and the participant's own past predictions which, in turn, determine the actual inflation rate. We consider two treatments, with a low and a high level of monetary growth, respectively. We find that the level of convergence to the monetary steady state is significantly lower and volatility of inflation rates higher in the second treatment. Constant gain learning algorithms, such as adaptive expectations with a low adjustment parameter, seem to provide a better description of the experimental data than decreasing gain algorithms, such as (ordinary) least squares learning. Moreover, many participants switch between prediction strategies during the experiment on the basis of poor performance of their initial prediction strategy.

We consider an analytically tractable asset pricing model describing the trading activity in a stylized market with two assets. Traders are boundedly rational expected utility maximizers with different beliefs about future prices and different investment horizons. In particular, we analyze the effects of the latter source of heterogeneity on the dynamics of price. We find that in the case with homogeneous agents, longer investment horizons lead to more stable dynamics. This is not true, however, in the case of a mixed population of traders, when the increase of heterogeneity in the investment horizons can introduce instability in the system. Furthermore, the role of heterogeneity turns out to be different for different trading behaviors and its effect on the aggregate dynamics depends on the whole ecology of agents' beliefs.

This paper presents an agent based model that investigates the possible outcomes of different fiscal and regulatory policies in a financially fragile economy. We analyse the consequences of the attempt by the government to counteract a downturn when it ignores the debt dynamics as modelled by Fisher and Minsky. In particular, we formulate an educated guess about the burden that the government and the taxpayer must bear when a bubble bursts, and its relationship with the extent of government intervention and the taxation system. We also evaluate the outcomes of possible alternatives or complementary regulatory policies. We model four different scenarios treating separately a tax on profits and a tax on private wealth and, for both of them, we specify two cases depending on whether the financial system is able to autonomously generate liquidity. Therefore, we can assess the effect of endogenous money and endogenous credit on the different stabilization policies.

The paper considers the formation of an average opinion index in a microfounded framework where firms switch between optimism and pessimism with certain transition probabilities. Here, the index represents a general business sentiment or the famous animal spirits, which feedback on themselves but are also influenced by the real interest rate. This concept is combined with three other components: the sentiment determines aggregate investment and thus finally the output gap in the economy; the variations of a so-called inflation climate are introduced into an ordinary Phillips curve; the interest rate is given by a Taylor rule. In this way, an alternative model of the new macroeconomic consensus is obtained, which is then reduced to two differential equations. The nonlinearities inherent in the sentiment adjustments can give rise to persistent endogenous cycles as well as multiple equilibria that may be locally stable or unstable. It is also demonstrated how the dynamics are affected by variations of a shift parameter that is interpreted as financial distress.

A growing body of literature reports evidence of social interaction effects in survey expectations. In this note, we argue that evidence in favor of social interaction effects should be treated with caution, or could even be spurious. Utilizing a parsimonious stochastic model of expectation formation and dynamics, we show that the existing sample sizes of survey expectations are about two orders of magnitude too small to reasonably distinguish between noise and interaction effects. Moreover, we argue that the problem is compounded by the fact that highly correlated responses among agents might not be caused by interaction effects at all, but instead by model-consistent beliefs. Ultimately, these results suggest that existing survey data cannot facilitate our understanding of the process of expectations formation.

In a simple, forward looking linear stochastic model we investigate the impact of heterogeneity in expectations formation on the speed of convergence of the learning process of agents towards equilibrium. We find that even when heterogeneity does not affect learnability in term of its asymptotic outcome, it can still have an important impact on the learnability of an equilibrium in terms of the speed of convergence of learning dynamics.

In this paper, we integrate heterogeneous inflation expectations into a simple monetary model. Guided by empirical evidence, we assume that boundedly rational agents, selecting between extrapolative and regressive forecasting rules to predict the future inflation rate, prefer rules that have produced low prediction errors in the past. We show that integrating this behavioral expectation formation process into the monetary model leads to the possibility of endogenous macroeconomic dynamics. For instance, our model replicates certain empirical regularities such as irregular growth cycles or inflation persistence. Moreover, we observe multi-stability via a Chenciner bifurcation.