Skip to main content
SpringerLink
Log in

Adaptive Microfoundations for Emergent Macroeconomics

  • Symposium Article
  • Published:
Eastern Economic Journal Aims and scope Submit manuscript

Abstract

In this paper we present the basics of a research program aimed at providing microfoundations to macroeconomic theory on the basis of computational agent-based adaptive descriptions of individual behavior. To exemplify our proposal, a simple prototype model of decentralized multi-market transactions is offered. We show that a very simple agent-based computational laboratory can challenge more structured Dynamic Stochastic General Equilibrium models in mimicking comovements over the business cycle.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Figure 1
Figure 2
Figure 3

Similar content being viewed by others

Notes

  1. The attempt by Lucas to build a monetary theory of business cycles in terms of informational asymmetries and misperceptions in a Walrasian framework [Lucas 1972; 1975] was discarded as logically inconsistent by Okun [1980] and Tobin [1980], in the same issue of the Journal of Money, Credit and Banking hosting the piece by Lucas cited in the main text. Lucas himself implicitly recognized it 5 years later, when he focused his 1985 Yrjö Jahnsson lectures on business cycles entirely on the RBC approach of Kydland and Prescott [Lucas 1987].

  2. Fixed-point theorems are also at the root of some impossibility results in computable economics. We will briefly touch on this point later on.

  3. A possible way to define Knightian uncertainty is that the potential outcomes of an action are identified by two or more distributions at one time, and that these distributions are overlapping.

  4. Several interpretations of the acronym KISS circulate, most of them overlapping. The one we prefer is keep it short and simple.

  5. In simulations, we fixed the duration of contracts to 8 periods, while the minimum wage is revised every 4 periods. If we assume that one simulation period corresponds to a quarter, this means that labor contracts last two years, while the minimum wage is revised annually.

  6. Examples of degenerate dynamics we want to avoid are extremely unstable aggregate GDP paths, average rates of bankruptcy and unemployment over 50 percent, and average rates of annualized inflation out of the interval (−100 percent, +1,000 percent).

  7. We use the Hodrick–Prescott filter with the smoothing parameter λ set at 1,400.

References

  • Acharya, Viral, Denis Gromb, and Tanyu Yorulmazer . 2008. Imperfect Competition in the Interbank Market for Liquidity as a Rationale for Central Banking. University of Chicago, mimeo.

  • Alchian, Alchian . 1950. Uncertainty, Evolution, and Economic Theory. Journal of Political Economy, 21: 39–53.

    Google Scholar 

  • Arrow, Kenneth . 1964. The Role of Securities in the Optimal Allocation of Risk-Bearing. Review of Economic Studies, 31: 91–96.

    Article  Google Scholar 

  • Arthur, Brian . 1992. On Learning and Adaptation in the Economy. Santa Fe Institute Working Paper No. 92-07-038.

  • Arthur, Brian, Steven Durlauf, and David Lane . 1997. The Economy as an Evolving Complex System II. Reading: Addison-Wesley.

    Google Scholar 

  • Baker, George, Michael Gibbs, and Bengt Holstrom . 1994. The Wage Policy of a Firm. Quarterly Journal of Economics, 109: 921–955.

    Article  Google Scholar 

  • Barro, Robert . 2006. Rare Disasters and Asset Prices in the Twentieth Century. Quarterly journal of Economics, 121: 823–866.

    Article  Google Scholar 

  • Bewley, Truman . 1999. Why Wages Don't Fall During Recessions. Cambridge: Harvard University Press.

    Google Scholar 

  • Bhaskar, Venkataraman, Stephen Machin, and Gavin Reid . 1993. Price and Quantity Adjustment over the Business Cycle: Evidence from Survey Data. Oxford Economic Papers, 45: 257–268.

    Google Scholar 

  • Bianchi, Carlo, Pasquale Cirillo, Mauro Gallegati, and Pietro Vagliasindi . 2007. Validating and Calibrating Agent-based Models: A Case Study. Computational Economics, 30: 245–264.

    Article  Google Scholar 

  • Campbell, Carl, and Kunal Kamlani . 1997. The Reasons for Wage Rigidity: Evidence from a Survey of Firms. Quarterly Journal of Economics, 112: 759–789.

    Article  Google Scholar 

  • Carroll, Christopher, and Steven Kimball . 1996. On the Concavity of the Consumption Function. Econometrica, 64: 981–992.

    Article  Google Scholar 

  • Chari, Varadarajan, Kohe Patrick, and Ellen McGrattan . 2002. Accounting for the Great Depression. American Economic Review, 92: 22–27.

    Article  Google Scholar 

  • Clower, Robert, and Peter Howitt . 2000. The Emergence of Economic Organization. Journal of Economic Behavior and Organization, 41: 55–84.

    Article  Google Scholar 

  • Cogley, Timothy, and James Nason . 1995. Output Dynamics in Real-Business-Cycle Models. American Economic Review, 85: 492–511.

    Google Scholar 

  • Colander, David ed. 1996. Beyond Microfoundations: Post-Walrasian Macroeconomics. Cambridge: Cambridge University Press.

    Book  Google Scholar 

  • Colander, David ed. 2006. Post Walrasian Macroeconomics. Beyond the Dynamics Stochastic General Equilibrium Model. Cambridge: Cambridge University Press.

    Book  Google Scholar 

  • Debreu, Gerard . 1959. The Theory of Value. New York: John Wiley.

    Google Scholar 

  • Delli Gatti, Domenico, Gaffeo Edoardo, Gallegati Mauro, and Antonio Palestrini . 2005. The Apprentice Wizard: Monetary Policy, Complexity and Learning. New Mathematics and Natural Computation, 1: 109–128.

    Article  Google Scholar 

  • Denzau, Arthur, and Douglas North . 1994. Shared Mental Models: Ideologies and Institutions. Kyklos, 47: 3–31.

    Article  Google Scholar 

  • Dew, Nicholas, Sarasvathy Saras, and Sankaran Venkataraman . 2004. The Economic Implications of Exaptation. Journal of Evolutionary Economics, 14: 69–84.

    Article  Google Scholar 

  • Dutta, Prajit, and Roy Radner . 1999. Profit Maximization and the Market Selection Hypothesis. Review of Economic Studies, 66: 769–798.

    Article  Google Scholar 

  • Epstein, Joshua . 2006. Remarks on the Foundations of Agent-Based Generative Social Science, in Handbook of Computational Economics II: Agent-Based Models, edited by Kenneth Judd and Leigh Tesfatsion. Amsterdam: North-Holland.

    Google Scholar 

  • Fazzari, Steven, and Michael Athey . 1989. Asymmetric Information, Financing Constraints and Investment. Review of Economics and Statistics, 69: 481–487.

    Article  Google Scholar 

  • Friedman, Milton . 1953. Essays in Positive Economics. Chicago: Chicago University Press.

    Google Scholar 

  • Gaffeo, Edoardo, Michele Catalano, Fabio Clementi, Domenico Delli Gatti, and Mauro Gallegati . 2007. Reflections on Modern Macroeconomics: Can we Travel along a Safer Road? Physica A, 382: 89–97.

    Article  Google Scholar 

  • Hartley, James . 1997. The Representative Agent in Macroeconomics. London: Routledge.

    Book  Google Scholar 

  • Hartley, James, Kevin Hoover, and Kevin Salyer . 1997. The Limits of Business Cycle Research: Assessing the Real Business Cycle Model. Oxford Review of Economic Policy, 13: 34–54.

    Article  Google Scholar 

  • Hayek, Friedrich . 1948. The Use of Knowledge in Society, in Individualism and Economic Order, edited by Friedrich Hayek. Chicago: University of Chicago Press.

    Google Scholar 

  • Hayek, Friedrich . 1978. New Studies in Philosophy, Politics and the History of Ideas. Chicago: Chicago University Press.

    Book  Google Scholar 

  • Hildebrand, Wiener . 1994. Market Demand. Princeton: Princeton University Press.

    Book  Google Scholar 

  • Judd, Kenneth, and Leigh Tesfatsion eds., 2006. Handbook of Computational Economics II: Agent-Based Models. Amsterdam: North-Holland.

    Google Scholar 

  • Kaldor, Nicholas . 1965. Capital Accumulation and Economic Growth, in The Theory of Capital, edited by Friedrich Lutz and Douglas Hague. London: McMillan.

    Google Scholar 

  • Kawasaki, S., J. McMillan, and K. Zimmerman . 1982. Disequilibrium Dynamics: An Empirical Study. American Economic Review, 72: 992–1004.

    Google Scholar 

  • Kirman, Alan . 1989. The Intrinsic Limits of Modern Economic Theory: The Emperor has no Clothes. Economic Journal, 99: 126–139.

    Article  Google Scholar 

  • Kydland, Fynn, and Edward Prescott . 1982. Time to Build and Aggregate Fluctuations. Econometrica, 50: 1345–1370.

    Article  Google Scholar 

  • LeBaron, Blake . 2001. Evolution and Time Horizons in an Agent-based Stock Market. Macroeconomic Dynamics, 5: 225–254.

    Article  Google Scholar 

  • Leijonhufvud, Axel . 1986. Capitalism and the Factory System, in Economics as a Process: Essays in the New Institutional Economics, edited by Richard Langlois. New York: Cambridge University Press.

    Google Scholar 

  • Leijonhufvud, Axel . 1995. Adaptive Behavior, Market Processes and the Computable Approach. Revue Économique, 46: 1497–1510.

    Google Scholar 

  • Leijonhufvud, Axel . 1998. Three Items for the Macroeconomic Agenda. Kyklos, 51: 197–218.

    Article  Google Scholar 

  • Leijonhufvud, Axel . 1999. Mr. Keynes and the Moderns. European Journal of the History of Economic Thought, 5: 169–188.

    Article  Google Scholar 

  • Lucas, Robert . 1972. Expectations and the Neutrality of Money. Journal of Economic Theory, 4: 103–124.

    Article  Google Scholar 

  • Lucas, Robert . 1975. An Equilibrium Model of the Business Cycle. Journal of Political Economy, 83: 1113–1144.

    Article  Google Scholar 

  • Lucas, Robert . 1980. Methods and Problems in Business Cycle Theory. Journal of Money, Credit, and Banking, 12: 696–715.

    Article  Google Scholar 

  • Lucas, Robert . 1987. Models of Business Cycles. Oxford: Basil Blackwell.

    Google Scholar 

  • Okun, Arthur . 1980. Rational Expectations-with-Misperceptions as a Theory of the Business Cycle. Journal of Money, Credit and Banking, 12: 817–825.

    Article  Google Scholar 

  • Reynard, Eric . 1979. A Method for Relating Research Spending to Net Profit. Research Management, 22: 12–14.

    Google Scholar 

  • Richter, Marcel, and Kam-Chau Wong . 1999. Non-Computability of Competitive Equilibrium. Economic Theory, 14: 1–28.

    Article  Google Scholar 

  • Rosser, Barkley . 2001. Alternative Keynesian and Post-Keynesian Perspectives on Uncertainty and Expectations. Journal of Post-Keynesian Economics, 23: 545–566.

    Article  Google Scholar 

  • Russo, Alberto, Michele Catalano, Edoardo Gaffeo, Mauro Gallegati, and Mauro Napoletano . 2007. Industrial Dynamics, Fiscal Policy and R&D: Evidence from a Computational Experiment. Journal of Economic Behavior and Organization, 64: 426–447.

    Article  Google Scholar 

  • Savage, Leonard . 1954. The Foundations of Statistics. New York: Wiley.

    Google Scholar 

  • Schelling, Thomas . 1978. Altruism, Meanness, and Other Potentially Strategic Behaviors. American Economic Review, 68: 229–230.

    Google Scholar 

  • Shubik, Martin . 1975. The General Equilibrium Model is Incomplete and not Adequate for the Reconciliation of Micro and Macroeconomic Theory. Kyklos, 28: 545–573.

    Article  Google Scholar 

  • Simon, Herbert . 1987. Satisficing, in The New Palgrave: A Dictionary of Economics, edited by John Eatwell, Murray Milgate and Peter Newman. London: McMillan.

    Google Scholar 

  • Souleles, Nicholas . 1999. The Response of Household Consumption to Income Tax Refunds. American Economic Review, 89: 947–958.

    Article  Google Scholar 

  • Stiglitz, Joseph . 1989. Imperfect Information in the Product Market, in Handbook of Industrial Organization, Vol. 1, edited by Richard Schmalensee and Robert Willig. Amsterdam: North-Holland.

    Google Scholar 

  • Tobin, James . 1980. Are New Classical Models Plausible Enough to Guide Policy? Journal of Money, Credit and Banking, 12: 788–799.

    Article  Google Scholar 

  • Weintraub, Roy . 1977. The Microfoundations of Macroeconomics: A Critical Survey. Journal of Economic Literature, 15: 1–23.

    Google Scholar 

  • Witt, Ulrich . 1986. Firms' Market Behavior Under Imperfect Information and Economic Natural Selection. Journal of Economic Behavior and Organization, 7: 265–290.

    Article  Google Scholar 

Download references

Acknowledgements

We are indebted to three anonymous referees for helpful comments on an earlier draft of this paper.

Author information

Authors and Affiliations

  1. Department of Economics and CEEL, University of Trento, Via Inama 5, Trento, I-38100, Italy

    Edoardo Gaffeo

  2. Institute of Economic Theory and Quantitative Methods, Catholic University of Milan, Milan, Italy

    Domenico Delli Gatti

  3. Department of Economics, Università Politecnica delle Marche, Ancona, Italy

    Saul Desiderio & Mauro Gallegati

Authors
  1. Edoardo Gaffeo
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Domenico Delli Gatti
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Saul Desiderio
    View author publications

    You can also search for this author in PubMed Google Scholar

  4. Mauro Gallegati
    View author publications

    You can also search for this author in PubMed Google Scholar

Rights and permissions

Reprints and permissions

About this article

Cite this article

Gaffeo, E., Delli Gatti, D., Desiderio, S. et al. Adaptive Microfoundations for Emergent Macroeconomics. Eastern Econ J 34, 441–463 (2008). https://doi.org/10.1057/eej.2008.27

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1057/eej.2008.27

Keywords

JEL Classifications

Search

Navigation