ACE Research Area:
Agent-Based Macroeconomics

Last Updated: 28 July 2023

Site Maintained By: Leigh Tesfatsion Research Professor & Professor Emerita of Economics Courtesy Research Professor of Electrical & Computer Engineering Heady Hall 260 Iowa State University Ames, Iowa 50011-1054 https://www2.econ.iastate.edu/tesfatsi/ tesfatsi AT iastate.edu Macroeconomic Coordination (Course Module) ACE Research Area: Agent-Based Financial Economics Macro and Financial Economics Resources Online ACE Course (Self-Study eBook) ACE Website

Table of Contents: Basic Issues General Introductory Materials General Introductions: Authored Readings Baseline Macroeconomic Models Additional Authored Introductory Readings Other Readings of Interest Software/Toolkits, Demos, Models Resource Groups and Sites

Basic Issues

• Scientists and engineers seek to understand how real things work and could work better. Presumably, the only legitimate sources of "discipline" for such research should be logic and empirical data.

• In other scientific fields, a system is said to be in some form of "equilibrium" if it exhibits some form of "unchanging condition" or "balance of forces." Examples include systems exhibiting constant growth rates, or systems for which outcome sizes over time are governed by a power law with a constant exponent, or systems for which expressed behaviors over time constitute a mixed-strategy Nash equilibrium. Whether a real-world system of interest is in (or converging towards) an equilibrium is then treated as a hypothesis that can be empirically tested.

• Why have many macroeconomic theorists since the early nineteen eighties instead insisted that "equilibrium" should be assumed a priori for macroeconomic models, as a required display of methodological discipline, rather than treated as an empirically testable hypothesis?

• More broadly, why have many macroeconomic theorists been willing to accept microfoundation presumptions seriously unrealistic in relation to macroeconomic purpose? A particularly egregious example is the continued heavy reliance on ad hoc "exogenous shock terms" as the sources of dynamic persistence and drivers of dynamic interactions in Dynamic Stochastic General Equilibrium (DSGE) models.

• Constructive Challenge for Macroeconomists:
  Suppose you are asked to construct a computational model of an open-ended macroeconomic system capable of sustaining itself over times t ≥ t^*. This construction is subject to the following four restrictions:
  1. The entities comprising the macroeconomic system (human, physical, biological, social, and/or institutional) include consumers with subsistence needs and firms with solvency requirements whose ultimate goal is to survive and prosper over time.
  2. The state of each modeled entity at each point in time consists of its data, attributes, and/or methods. For example:
     • Data can include: recorded physical sensations; empirical observations; statistical summaries; and information about agent interaction networks.
     • Attributes can include: physical conditions; financial conditions; beliefs; preferences; and goals.
     • And methods can include: data acquisition; data interpretation; physical laws; (pseudo) random number generators; logical deduction; production processes; consumption processes; optimization routines; learning algorithms; and decision rules.
  3. You (the modeler) are permitted to configure and specify the initial state of each modeled entity at the initial time t^*. However, you (the modeler) are not allowed to interfere thereafter. Rather, all state changes and other system outcomes realized during subsequent times t > t^* must be driven solely by entity interactions.
  4. The goal is to construct a virtual macroeconomy at the initial time t^* that is able to achieve a sustainable circular flow among consumption and production activities over time in which consumers are meeting their subsistence needs and firms are maintaining their solvency.
  How would you go about this constructive modeling exercise?

• The above constructive challenge requires a modeler to specify initial conditions within a computational "Petri dish" for a macroeconomic system that is subsequently capable of operating as a sustainable dynamic system without reliance on ad-hoc modeler-imposed equilibrium conditions. If this challenge stumps someone, to what extent can that person be said to understand how real-world macroeconomies actually work? Can a person unable to construct even a simple working radio be taken seriously as an electronics engineer?

• How might the economics curriculum be modified to permit economic students to gain a more constructive understanding of real-world economic processes (e.g., expectation formation, intertemporal planning, production, price discovery, buyer-seller matching, payment settlements, firm entry/exit, longer-term contractual relationships)? How might they be encouraged to engage more fully with the real-world entities who carry out these processes?

• Decision-making agents in computational models can have learning capabilities ranging from simple reactive reinforcement methods to sophisticated anticipatory learning algorithms for the approximate achievement of intertemporal objectives. To what extent is it important to recognize learning capabilities within macroeconomic models? More generally, what about strategic anticipatory learning that explicitly takes into account the possible effects of a current decision on the future decisions of other agents?

• How to model and study the integrated operation of real and financial sectors in macroeconomic systems?

• How to model and study the co-evolution of market behaviors and market institutions in macroeconomic systems?

General Introductory Materials

• How Science can Improve Understanding of the Economy (YouTube, 80min), panel session (with subsequent Q&A) featuring fascinating, informative, and humorous presentations and remarks by Joseph Stiglitz, Columbia University, and Alan Kirman, École des Hautes Études en Sciences Sociales (EHESS), on past, current, and potential future developments in macroeconomic theory. Part of the Festschrift for Alan Kirman conference sponsored by Rebuilding Macroeconomics, 16-17 March 2023.

• The Economic Crisis and the Crisis in Economics (Overview,HTML) Institute for New Economic Thinking, Inaugural Conference @King's College, Cambridge, England, April 8-11, 2010. Videos of presented talks are posted for viewing, including talks by George Akerlof, J. Doyne Farmer, Duncan Foley, David Hendry, Katerina Juselius, Ken Rogoff, Chris Sims, George Soros, Joe Stiglitz, and Harald Uhlig, among many others.

• Building a Science of Economics for the Real World, Committee on Science and Technology, U.S. House of Representatives, July 20, 2010, Congressional Testimony given by Brad Miller, Robert Solow, Sidney Winter, Scott Page, David Colander, and V. V. Chari

• "The New Model Army: Efforts are Underway to Improve Macroeconomic Models", The Economist, January 19, 2013.

• "Remaking Macro: Building a Better Model", The Economist, January 31, 2013.

General Introductions: Authored Readings

• Mark Buchanan, "Meltdown Modeling: Could Agent-Based Computer Models Prevent Another Financial Crisis?" (pdf,1.2KB), Nature, Vol. 460, August 6, 2009, 680-682.

• Ricardo J. Caballero, "Macroeconomics After the Crisis: Time to Deal with the Pretense-of-Knowledge Syndrome" (pdf,563), Journal of Economic Perspectives, Vol. 24, No. 4, Fall 2010, 85-102.

  Abstract: The author argues that "the root cause of the poor state of affairs in the field of macroeconomics lies in a fundamental tension in academic macroeconomics between the enormous complexity of its subject and the micro-theory-like precision to which we aspire."

• Giovanni Dosi, "Economic Coordination and Dynamics: Some Elements of an Alternative `Evolutionary' Paradigm" (pdf,745KB), Institute for New Economic Thinking (INET), November 18, 2011.

  Abstract: The author provides a wide-ranging impassioned critique of the currently mainstream Dynamic Stochastic General Equilibrium (DSGE) paradigm for macroeconomics, founded on the notions of equilibrium, utility maximization, and stable preferences. He argues that this paradigm needs to be replaced by an alternative evolutionary paradigm that understands economic phenomena `as outcomes of far-from-equilibrium interactions among heterogeneous agents, characterized by endogenous preferences, most often boundedly rational, but always capable of learning, adapting and innovating.' "

• Giorgio Fagiolo and Andrea Roventini, "Macroeconomic Policy in DSGE and Agent-Based Models Redux: New Developments and Challenges ahead" (pdf,345KB), Journal of Artificial Societies and Social Simulation 20(1), 2017 (electronic). DOI:10.18564/jasss.3280

  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 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.

• J. Doyne Farmer and Duncan Foley, "The Economy Needs Agent-Based Modelling" (pdf,922KB), Nature, Vol. 460, August 6, 2009, 685-686.

• J. Doyne Farmer, "The Challenge of Building Agent-Based Models of the Economy" (pdf,4.1MB), European Central Bank, Frankfurt, June 10, 2011.

  Abstract: Using concrete examples, this wide-ranging talk explains why agent-based models could be useful for obtaining more empirically-valid and policy-useful representations of macroeconomic systems.

• Mauro Gallegati, "Paradigm Lost: Rethinking Economics and Politics" (pdf,5765KB), Reconstructing Economics: Agent-Based Models and Complexity, Conference Proceedings, Berlin, April 12-15, 2012.

  Abstract: This paper provides an unusually thorough and thoughtful look at the historical development of the dominant paradigm in mainstream economic theory based on representative agents with no direct agent interactions. It critiques that paradigm and surveys two recently developed approaches as viable alternatives: agent-based computational economics (ACE); and analytically solvable heterogeneous interacting agents (ASHIA) models.

• Andrew G. Haldane, The Dappled World (pdf,2.3MB), GLS Shackle Biennial Memorial Lecture, Bank of England, 10 November 2016. An animated version of this lecture is also available.

  Abstract: Although (the recent) crisis in economics is a threat for some, for others it is an opportunity -- an opportunity to make a great leap forward, as Keynes did in the 1930s. For the students in this room, there is the chance to rethink economics with as clean a sheet of paper as you are ever likely to find. That is perhaps why the numbers of students applying to study economics has shot up over recent years. This is one of the silver linings of the crisis. No discipline could ask for a better endowment. But seizing this opportunity requires a re-examination of the contours of economics and an exploration of some new pathways. That is what I wish to do in this lecture..."

• David F. Hendry and John N.J. Muellbauer, "The Future of Macroeconomics: Macro Theory and Models at the Bank of England" (pdf,588KB), Oxford Review of Economic Policy, 2020, to appear.

  Abstract: This paper is about policy modelling at central banks, with a particular focus on past and current policy modelling at the Bank of England. It reviews criticisms of quantitative policy models used by central banks, as well as criticisms of prevailing fashions in macroeconomic theory that have influended the training of central bank economists.

• Peter Howitt, "What Have Central Bankers Learned from Modern Macroeconomic Theory?" (pdf,338KB), Journal of Macroeconomics, Vol. 34, Issue 1, 2012, 11-22. DOI:10.1016/j.jmacro.2011.08.005.

  Abstract: "In this essay I argue that modern macroeconomic theory has fallen behind the practice of central banking. After briefly summarizing the current state of macro theory, I focus on what strikes me as the two most important developments in monetary policy in the last two decades – inflation targeting and dealing with financial crises. My analysis rejects the claims made by several authors to the effect that the proliferation of inflation-targeting regimes around the globe represents an application of well-established principles of macroeconomic theory. As for how monetary policy can promote financial stability, a subject on which most economists agree modern theory has been of little help, I argue that macroeconomics has lost touch with the fundamental raison d’être of central banking. My diagnosis is that macroeconomic theory has become distracted by its preoccupation with states of equilibrium, a preoccupation that inhibits analysis of a market economy’s coordination mechanisms. I conclude with a plea for a more diverse ecology of approaches to macroeconomic theory, one that finds room for agent-based computational economics as well as for more conventional equilibrium theories."

• John Lanchester, The Major Blind Spots in Macroeconomics html, New York Times Magazine, February 7, 2017.

• Blake LeBaron and Leigh Tesfatsion, "Modeling Macroeconomies as Open-Ended Dynamic Systems of Interacting Agents" (pdf,45KB), American Economic Review (Papers & Proceedings), Volume 98, No. 2, 2008, pp. 246-250.

  Abstract: This study discusses the potential applicability of Agent-based Computational Economics (ACE) for macroeconomic modeling, with a particular stress on the following three issues: (1) taxonomy - what types of agents for macroeconomic models?; (2) scale robustness - how many agents for macroeconomic models?; and (3) empirical validation - connecting to data.

• Axel Leijonhufvud, "Axel in Wonderland: DSGE" (pdf,74KB), Comment on Jordi Gali, Frank Smets, and Rafael Wouters, "Unemployment in an Estimated New Keynesian Model" at the Research Workshop on "Analyzing the Macroeconomy: DSGE versus Agent-Based Modelling," Central Bank of Austria, June 15-16, 2011.

  Abstract: The author notes that DSGE is a branch of a tree that has prospered in recent years, and that the paper to be discussed poses a choice between two of its outermost twigs. The author explains why he finds himself perched on another branch altogether.

• Mauro Napoletano, Jean-Luc Gaffard, and Zakaria Babutsidze, "Agent Based Models: A New Tool for Economic and Policy Analysis" (pdf,146KB), French Economic Observatory (OFCE) Briefing Paper No. 3, March 15, 2012.

  Abstract: This briefing paper provides a concise summary of current criticisms that have been directed towards standard DSGE macroeconomic models. It then describes an alternative class of models that has received increased attention in the recent years, Agent Based Models (ABMs), and discusses recent macroeconomic research making use of an ABM approach.

• Hashem Pesaran and Ron P. Smith, "Beyond the DSGE Straitjacket" (pdf,244KB), IZA Discussion Paper No. 5661, Institute for the Study of Labor (IZA), Bonn, Germany, April 2011.

  Abstract: "Academic macroeconomics and the research department of central banks have come to be dominated by Dynamic, Stochastic, General Equilibrium (DSGE) models based on microfoundations of optimising representative agents with rational expectations. We argue that the dominance of this particular sort of DSGE and the resistance of some in the profession to alternatives has become a straitjacket that restricts empirical and theoretical experimentation and inhibits innovation and that the profession should embrace a more flexible approach to macroeconometric modelling. We describe one possible approach."

• Matteo Richiardi, "The Future of Agent-Based Modelling" (pdf,323KB), Working Paper, Institute for New Economic Thinking, Nuffield College, Oxford, UK, June 2015.

  Abstract: The author elaborates on the role of agent-based modeling (ABM) for macroeconomic research. His main tenet is that the full potential of the ABM approach, not yet realized, lies in the modular nature of ABMs. He envisions the foundation of a Modular Macroeconomic Science, where new models with heterogeneous interacting agents, endowed with partial information and limited computational ability, can be created by recombining and extending existing models in a unified computational framework.

• Paul Romer, The Trouble with Macroeconomics (pdf,1.2KB), American Economist, Vol. 20, 2016/1/5, pp. 1-20. See, also, Romer's response to received comments here.

• Joseph E. Stiglitz, "Where Modern Macroeconomics Went Wrong" (pdf,438KB), Working Paper 23795, National Bureau of Economic Research, Revised November 2017.

  Abstract: This paper provides a critique of the DSGE models that have come to dominate macroeconomics during the past quarter-century. It argues that at the heart of the failure were the wrong microfoundations, which failed to incorporate key aspects of economic behavior, e.g. incorporating insights from information economics and behavioral economics. Inadequate modelling of the financial sector meant they were ill-suited for predicting or responding to a financial crisis; and a reliance on representative agent models meant they were ill-suited for analysing either the role of distribution in fluctuations and crises or the consequences of fluctuations on inequality. The paper proposes alternative benchmark models that may be more useful both in understanding deep downturns and responding to them.

• Joseph E. Stiglitz and Mauro Gallegati, "Heterogeneous Interacting Agent Models for Understanding Monetary Economics" (pdf,87KB), Eastern Economic Journal, Vol. 37, 2011, 6-12.

  Abstract: "The representative agent (RA) approach of the mainstream economics allows a rich analysis of intertemporal maximization; but it rules out the possibility of the analysis of complex interactions. It is the latter that are at the root of this and other crises. We argue that the RA approach is simply not up to the task of enhancing our understanding of modern macroeconomies and that the standard cannot provide an adequate framework for understanding the economy even in more normal times. We advocate a bottom-up approach, where high-level (macroeconomic) systems may possess new and different properties than the low-level (microeconomic) systems on which they are based. The heterogeneous agent approach provides an alternative, one which has already proven its metal in helping us understand the interlinkages which helped give rise to the crisis."

• Servaas Storm, "Cordon of Conformity: Why DSGE Models Are Not the Future of Macroeconomics" (pdf,2MB), International Journal of Political Economy, Vol. 50, No. 2, 2021, 77-98, DOI: 10.1080/08911916.2021.1929582

  Abstract: This paper reviews ten fundamental weaknesses inherent in DSGE models which make these models irreparably useless for macroeconomic policy analysis. Mainstream macroeconomics must put DSGE models, once and for all, in the Museum of Implausible Economic Models -- and learn important lessons from non-DSGE macroeconomic approaches.

• Paul Streeten, "What's Wrong with Contemporary Economics?" (pdf,209KB), Interdisciplinary Science Reviews, Vol. 27, No. 1, 2002,13-24.

  Abstract: The author argues that, in educating economists, we should sacrifice some of the more technical aspects of economics (which can be learned later) in favour of the required inclusion of relevant interdisciplinary studies. ... (Regarding) the place of mathematics in economics, fuzziness enters when symbols a, b, c are identified with individuals,firms, or farms. The identification of the clear-cut symbol with the often ambiguous and fuzzy reality invites lack of precision and blurs the concepts.

• Leigh Tesfatsion, "Elements of Dynamic Economic Modeling: Presentation and Analysis" (WP,pdf,634KB), Eastern Economic Journal 43(2), 2016, 192-216. doi:10.1057/eej.2016.2

  Abstract: The primary goal of these introductory notes is to promote the clear presentation and rigorous analysis of dynamic economic models, whether expressed in equation or agent-based form. A secondary goal is to promote the use of initial-value state space modeling with its regard for historical process, for cause leading to effect without the external imposition of global coordination constraints on agent actions. Economists who claim to respect individual rationality should not be doing for their modeled economic agents what in reality these agents must do for themselves.

• Leigh Tesfatsion, "Agent-Based Macroeconomics: Constructive Modeling of Decentralized Market Economies" (Slides,pdf,1.6MB).

  Abstract: This presentation begins by discussing the growing interest among economists in modeling approaches specifically designed for the study of complex real-world economic systems. Attention is then focused on one of these modeling approaches, Agent-based Computational Economics (ACE). A constructive exercise is conducted to demonstrate ACE capabilities for modeling market organization, behaviors, and procurement processes without reliance on externally imposed coordination conditions. Three illustrative ACE macroeconomic applications are then briefly summarized: an ACE two-sector trading model; an ACE modeling of the European Union; and an ACE macroeconomic model that replaces the "E" in a DSGE model with learning agents.

• Leigh Tesfatsion, "Modeling Economic Systems as Locally-Constructive Sequential Games" [(Preprint,pdf,654KB), (Slides,pdf,1MB)], Journal of Economic Methodology, Vol. 24, Issue 4, 2017, 384-409.

  Abstract: Real-world economies are open-ended dynamic systems consisting of heterogeneous interacting participants. Human participants are decision-makers who strategically take into account the past actions and potential future actions of other participants. All participants are forced to be locally constructive, meaning their actions at any given time must be based on their local states; and participant actions at any given time affect future local states. Taken together, these essential properties imply real-world economies are locally-constructive sequential games. This paper discusses a modeling approach, Agent-based Computational Economics (ACE), that permits researchers to study economic systems from this point of view. ACE modeling principles and objectives are first concisely presented and explained. The remainder of the paper then highlights challenging issues and edgier explorations that ACE researchers are currently pursuing.

• Jean-Claude Trichet, President of the European Central Bank,"Reflections on the Nature of Monetary Policy Non-Standard Measures and Finance Theory", November 18, 2010. Available online here.

  Excerpts from Section 3 of the above speech: "When the crisis came, the serious limitation of existing economic and financial models immediately became apparent. Arbitrage broke down ... markets froze ... market participants were gripped by panic. Macro models failed to predict the crisis and ... [to explain] what was happening ..."

  "[In] the face of crisis, we felt abandoned by conventional tools. ... The key lesson ... is the danger of relying on a single tool, methodology or paradigm. The atomistic, optimising agents underlying existing models do not capture behavior during a crisis period. Agent-based modelling ... allows for more complex interactions between agents. ... we need to better integrate the crucial role played by the financial system into our macroscopic models."

  "I would very much welcome inspiration from other disciplines: physics, engineering, psychology, biology. Bringing experts from these fields together with economists and central bankers is potentially very ... valuable."

  "A large number of aspects of the observed behaviour of financial markets is hard to reconcile with the efficient market hypothesis... But a determinedly empirical approach -- which places a premium on inductive reasoning based on the data, rather than deductive reasoning grounded in abstract premises or assumptions -- lies at the heart of these methods ... simulations will play a helpful role."

• David Vines and Samuel Wills (Guest Eds.), Rebuilding Macroeconomic Theory (pdf,4.23MB), Special Issue of the Oxford Review of Economic Policy, Volume 34, Nos. 1-2, Spring and Summer 2018.

Baseline Macroeconomic Models

• Peter Albin and Duncan K. Foley, "Decentralized, Dispersed Exchange Without an Auctioneer", Journal of Economic Behavior and Organization, Volume 18, 1992, pp. 27-51. Published article available from Science Direct.

  Abstract: Albin and Foley simulate pure exchange among geographically dispersed utility-seeking agents with endowments of two distinct types of goods and with bounds to rationality and calculation. Exchange is entirely decentralized. It is initialized by individual agents who broadcast costly messages to their neighbors indicating their interest in engaging in bilateral trades. This decentralized mechanism is shown to achieve a substantial improvement in the allocation of resources and the average welfare of agents in comparison with randomized initial endowments, but persistent differences arise from Walrasian equilibrium.

• Quamrul Ashraf, Boris Gershman, and Peter Howitt, "Banks, Market Organization, and Macroeconomic Performance: An Agent-Based Computational Analysis" (pdf,414KB), Cleveland Federal Reserve Bank Conference, revised April 2010. See also the authors' accompanying C++ software (zip,77KB) and the Discussant Comments by Robert J. Tetlow (pdf,161KB).

  Abstract: "This paper is an exploratory analysis of the role that banks play in supporting what Jevons called the mechanism of exchange. It considers a model economy in which exchange activities are facilitated and coordinated by a self-organizing network of entrepreneurial trading firms. Collectively these firms play the part of the Walrasian auctioneer, matching buyers with sellers and helping the economy to approximate equilibrium prices that no individual is able to calculate. Banks affect macroeconomic performance in this economy because their lending activities facilitate entry of trading firms and also influence their exit decisions. Both entry and exit have conflicting effects on performance, and we resort to computational analysis to understand how these conflicting effects are resolved. Our analysis sheds new light on the conflict between micro prudential bank regulation and macroeconomic stability."

• Robert L. Bennett and Barbara R. Bergmann, A Microsimulated Transactions Model of the United States Economy (Chapters 1-2, pdf, 1.5M), Johns Hopkins University Press, Baltimore, MD, 1986.

  Abstract: This seminal work develops an empirically-grounded state-space modeling of an economy formulated at the level of the decision-making processes of microeconomic units (firms, consumers, financial intermediaries) and government units (local, state, federal). Each decision-making unit is modeled as a collection of hypothesized if-then decision rules specified constructively (recursively) as state-conditioned transition processes, thus respecting historical cause-effect relationships. Initial conditions, decision-making processes, and modeled institutional arrangements are strongly based on empirical data.

• Alessandro Caiani, Antoine Godin, Eugenio Caverzasi, Mauro Gallegati, Stephen Kinsella, and Joseph E.Stiglitz, "Agent Based-Stock Flow Consistent Macroeconomics: Towards a Benchmark Model" (pdf,1.6MB), Journal of Economic Dynamics and Control, Vol. 69, 2016, 375-408.

  Abstract: "This paper argues that a coherent and exhaustive representation of the inter-linkages between the real and financial sides of the economy should be a pivotal feature of every macroeconomic model and proposes a macroeconomic framework based on the combination of the Agent Based and Stock Flow Consistent approaches. The papers aims at contributing to the nascent AB-SFC literature under two fundamental respects: first, we develop a fully decentralized AB-SFC model with several innovative features, and we thoroughly validate it in order to check whether the model is a good candidate for policy analysis applications. Results suggest that the properties of the model match many empirical regularities, ranking among the best performers in the related literature, and that these properties are robust across different parameterizations. Second,the paper has also a methodological purpose in that we try to provide a set of rules and tools to build, calibrate, validate,and display AB-SFC models."

• Herbert Dawid, Simon Gemkow, Philipp Harting, Sander van der Hoog, and Michael Neugart, "Agent-Based Macroeconomic Modeling and Policy Analysis: The Eurace@Unibi Model" (pdf,1.4MB), In S.-H. Chen (Ed.), Handbook on Computational Economics and Finance, Oxford University Press, 2015.

  Abstract: The Eurace@Unibi model is an agent-based simulation framework that provides a representation of a closed macroeconomic model with spatial structure. The main purpose of the model is to provide a unified framework for policy analysis in different economic policy areas and to permit the examination of general macroeconomic research questions. This paper provides a description of the modeling assumptions and economic features of the Eurace@Unibi model. It also shows typical patterns of the output generated by this model and compares these patterns to empirically observable stylized facts.

• Giovanni Dosi, Giorgio Fagiolo, and Andrea Roventini, "Schumpeter Meeting Keynes: A Policy-Friendly Model of Endogenous Growth and Business Cycles" (pdf,402KB), Journal of Economic Dynamics and Control 34 (2010), 1748-1767.

  Abstract: This paper studies an agent-based model that bridges Keynesian theories of demand-generation and Schumpeterian theories of technology-fueled economic growth. The authors employ the model to investigate the properties of macroeconomic dynamics and the impact of public policies on supply, demand, and other fundamental aspects of the economy.

• Herbert Gintis, "The Emergence of a Price System from Decentralized Bilateral Exchange" (pdf,382KB), The B.E. Journal of Theoretical Economics, Vol. 6, Issue 1 (Contributions), Article 13, August 18, 2005. Published article available from the Berkeley Economics Press here.

  Abstract: "This paper derives the price system in an agent-based model of decentralized bilateral exchange. When the economy is out of equilibrium, prices are individual subjective estimates of payoff-maximizing exchange ratios and hence are the private information of individual agents. The author shows, however, that a system of public prices emerges in the long run, and these public prices are equilibria of the underlying general equilibrium model. The author notes that this is the first time that a general, decentralized adjustment mechanism has been constructed that renders market equilibrium dynamically stable in a production and exchange economy (albeit highly simplified)."

• Herbert Gintis, "The Dynamics of General Equilibrium" (pdf,747KB), The Economic Journal, Vol. 117 (October), 2007, 1280-1309.

  Abstract: "The Walrasian general equilibrium model is the centrepiece of modern economic theory, but progress in understanding its dynamical properties has been meagre. This article shows that the instability of Walras' Tâtonnement process is due to the public nature of prices, which leads to excessive correlation in the behaviour of economic agents. When prices are private information, a dynamic with a globally stable stationary state obtains in economies that are unstable in the tâtonnment process. We provide an agent-based model of a multi-sector Walrasian economy with production and exchange, in which prices are private information. This economy is dynamically well behaved."

• Marco Gross, "Beautiful Cycles: A Theory and a Model Implying a Curious Role for Interest" (pdf,2.9MB), IMF Working Paper WP/21/67, International Monetary Fund, March 2021.

  Abstract: "Where do economic cycles come from? This paper contemplates an utmost minimalistic model and underlying theory that rest on two assumptions for letting them emerge endogenously: first, the presence of interest-bearing debt; and second, a degree of downward nominal wage rigidity. Despite its parsimony, the model generates well-behaved, self-evolving limit cycles and replicates the following six essential empirical facts: (1) booms are long-lived while recessions short-lived; (2) leverage is procyclical; (3) firm profit and wage shares in GDP are counter-cyclical and procyclical, respectively; (4) Phillips curves are downward-sloping and convex, and Okun’s law relation is replicated; (5) default cascades arise endogenously at the turning points to recessions; and (6) lending spreads are countercyclical. One can refer to the model as being of a Dynamic Stochastic General Disequilibrium (DSGD) kind."

• Matthias Lengnick, "Agent-Based Macroeconomics: A Baseline Model" (pdf,1.6MB), Journal of Economic Behavior and Organization, Vol. 86, 2013, 102-120.

  Abstract: "This paper develops a baseline agent-based macroeconomic model and contrasts it with the common dynamic stochastic general equilibrium approach. Although simple, the model can reproduce a lot of the stylized facts of business cycles. The author argues that agent-based modeling is an adequate response to the recently expressed criticism of macroeconomic methodology. It does not depend on the strict assumption of rationality and allows for aggregate behavior that is more than simply a replication of microeconomic optimization decisions. At the same time it allows for absolutely consistent micro foundations. Most importantly, it does not depend on equilibrium assumptions or fictitious auctioneers and does therefore not rule out coordination failures, instability and crisis by definition. ... The model is programmed in Java. All source code is available upon request."

• Marc Oeffner, "Agent-Based Keynesian Macroeconomics" (Thesis Intro/Refs Only, pdf, 455KB), (Entire Thesis, pdf, 3.4MKB), Dissertation, Julius-Maximilians-Universität Würzburg, Germany, September 2008.

  Abstract: The 61-page introduction to this thesis provides a comprehensive survey ACE modeling tools for the development and study of macroeconomic systems, available as of 2008. The final chapters of this thesis develop, implement, validate, and study a proof-of-concept monetary macroeconomic model using the SeSAm multi-agent simulation environment. Complete code for this SeSAm implementation can be obtained in a zip file named (39MB) file available here.

• Sebastian Poledna, Michael Gregor Miess, and Cars Hommes "Economic Forecasting with an Agent-Based Model" (WP,pdf,385KB), SSRN Preprint, November 6, 2020.

  Abstract: "We develop the first agent-based model (ABM) that can compete with and in the long run significantly outperform benchmark VAR and DSGE models in out-of-sample forecasting of macro variables. Our ABM for a small open economy uses micro and macro data from national sector accounts, input-output tables, government statistics, and census data. The model incorporates all economic activities as classified by the European System of Accounts as heterogeneous agents. The detailed structure of the ABM allows for a breakdown into sector level forecasts. In a recent application, we have used the detailed structure of the ABM to forecast the medium-run macroeconomic effects of lockdown measures taken in Austria to combat the COVID-19 crisis. Other potential applications of the model include stress-testing and predicting the effects of monetary or fiscal macroeconomic policies."

• Pascal Seppecher, "Flexibility of Wages and Macroeconomic Instability in an Agent-Based Computational Model with Endogenous Money" (pdf,1.4MB), Working Paper, CEMAFI, 2010, revised version to appear in Macroeconomic Dynamics. Note: The agent-based modeling for this work was implemented using the Java Agent-Based Macroeconomic Laboratory (Jamel) developed by the author; details of this implementation can be found in this technical appendix (pdf,690KB).

  Abstract: The author presents a model of a dynamic and complex economy in which the creation and destruction of money result from interactions between multiple heterogeneous agents. In the baseline scenario the income distribution between wages and profits is observed to stabilize. The model is then altered by increasing the flexibility of wages. This change leads to the formation of a deflationary spiral. Aggregate activity decreases and unemployment increases. The macroeconomic stability of the model is affected and eventually a systemic crisis arises. Finally, it is shown that the introduction of a minimum wage boosts aggregate demand and avoids the crisis.

• Ekaterina Sinitskaya and Leigh Tesfatsion, "Macroeconomies as Constructively Rational Games" (WP,pdf,1.2MB), Journal of Economic Dynamics and Control 61 (2015), 152-182.

  Abstract: "Real-world decision-makers are forced to be locally constructive; that is, their decisions are necessarily constrained by their interaction networks, information, beliefs, and physical states. This study transforms an otherwise standard dynamic macroeconomic model into an open-ended dynamic game by requiring consumers and firms with intertemporal utility and profit objectives to be locally constructive. Tested locally-constructive decision processes for the consumers and firms range from simple reactive reinforcement learning to adaptive dynamic programming (ADP). Computational experiments are used to explore macroeconomic performance under alternative decision-process combinations relative to a social planner benchmark solution. A key finding is that simpler decision processes can outperform more sophisticated decision processes such as ADP. However, memory length permitting some degree of adaptive foresight is critical for good performance."

• Frank Westerhoff and Reiner Franke, "Agent-Based Models for Economic Policy Design: Two Illustrative Examples" (pdf,367KB), BERG Working Paper No. 88, University of Bamberg, 2012.

  Abstract: "With the help of two examples, we illustrate the usefulness of agent-based models as a tool for economic policy design. In our first example, we apply a financial market model in which the order flow of speculators, relying on technical and fundamental analysis, generates intricate price dynamics. In our second example, we apply a Keynesian-type goods market model in which the investment behavior of firms, relying on extrapolative and regressive predictors, generates complex business cycles. We add a central authority to these two setups and explore the impact of simple intervention strategies on the model dynamics. Based on these experiments, we conclude that agent-based models may help us to understand how markets function and to evaluate the effectiveness of various stabilization policies."

• Frank Westerhoff, "An Agent-Based Macroeconomic Model with Interacting Firms, Socio-Economic Opinion Formation, and Optimistic/Pessimistic Sales Expectations" (pdf,278KB), New Journal of Physics 12, 2010, 07035 (electronic).

  Abstract: "We propose a simple agent-based macroeconomic model in which firms hold heterogeneous sales expectations. A firm may either optimistically expect an increase in its sales or pessimistically expect the opposite. Whether a given firm is optimistic or pessimistic depends on macroeconomic conditions and the average mood prevailing within its social/local neighborhood. For instance, the probability of a firm taking an optimistic view increases not only during a boom but also with the number of its optimistic neighbors. We show that such an economy may give rise to co-evolving dynamics between the business cycle and the firms’ average sentiment."

• Volker Wieland, Tobias Cwik, Gernot J. Muller, Sebastian Schmidt, and Maik Wolters, "A New Comparative Approach to Macroeconomic Modeling and Policy Analysis" (pdf,833KB), Working Paper, January 23, 2012.

  Abstract: This paper provides a new approach that enables individual researchers to conduct model comparisons easily, frequently, at low cost and on a large scale. Using this approach a model archive is built that includes many well-known empirically estimated models that may be used for quantitative analysis of monetary and fiscal stabilization policies. A computational platform is created that allows straightforward comparisons of models’ implications. Its application is illustrated by comparing different monetary and fiscal policies across selected models. Researchers can easily include new models in the data base and compare the effects of novel extensions to established benchmarks thereby fostering a comparative instead of insular approach to model development.

• Volker Wieland (Professor of Monetary Theory and Policy, Goethe University, Frankfurt) has developed the The Macroeconomic Data Base, an archive of macroeconomic models based on a common platform that provides various tools for systematic model comparison. He is actively calling for macroeconomists to submit models to this data base using a wide range of approaches (including agent-based macroeconomics) so that strengths and weaknesses can be properly evaluated.

Additional Authored Introductory Readings

• Masanao Aoki, "Non-Self-Averaging in Macroeconomic Models: A Criticism of Modern Micro-Founded Macroeconomics", Journal of Economic Interaction and Coordination 7(1), May 2012, 1-22 (doi).

  Abstract: When the coefficient of variation, namely the ratio of the standard deviation over the mean, approaches zero as the number of economic agents becomes large, a system is called self-averaging. Otherwise, it is non-self-averaging. Most (macro)economic models take it for granted that the economic system is self-averaging (thus legitimizing a focus solely on the means of aggregate variables). However, they are based on the extremely unrealistic assumption that all the economic agents face the same probability distribution (for micro shocks), and that (these) micro shocks are independent. Once these unrealistic assumptions are dropped, non-self-averaging behavior naturally emerges.

• W. Brian Arthur, Complexity and the Economy, Oxford University Press, 2015.

  Abstract: "In this book, Arthur collects many of his pioneering articles on this new theory (of complexity economics). The papers, beautifully written, were among the first to use evolutionary computation, agent-based modeling, and cognitive psychology. They cover topics as disparate as how markets form out of forecasts and beliefs; how technology evolves over the long span of time; why systems and bureaucracies get more complicated as they evolve; and how financial meltdowns can be foressen and prevented in the future."

• Rob Axtell, "Very Large-Scale Multi-Agent Systems and Emergent Macroeconomics" (pdf,559KB), Lecture Notes, The Brookings Institution, Washington, D.C., 2005.

• J.-Ph. Bouchaud, S. Gualdi, M. Tarzia, F. Zamponi, J. Batista, D. Challet, J. Bonart, A. Landier, and D. Thesmar, Tipping Points and Crises in Simple Macroeconomic Models (pdf,2.4MB), Complexity Research Initiative For Systemic Instabilities (CRISIS), CFM/Polytechnique, Paris, 2015.

  Abstract: This intriguing talk uses a phase diagram approach to discuss critical regions in the parameter space for a macroeconomic system separated by boundaries which, if crossed, lead to qualitatively distinct types of dynamic system behaviors. Of particular interest are "dark corners," i.e., critical regions within which the macroeconomic system displays adverse behaviors associated with economic and financial crises.

• Mark Buchanan, Forecast: What Physics, Meteorology, and the Natural Sciences Can Teach Us About Economics (Book Site), Bloomsbury Publishing, London, 2013.

  Abstract: "In this thoroughly researched and piercingly intelligent book, physicist Mark Buchanan shows how a simple feedback loop can lead to major consequences, the kind predictable by mathematical models but hard for most people to anticipate. From his unique perspective, Buchanan argues that our basic assumptions about economic markets - that they are for the most part stable, with occasional interruptions - are simply wrong. Markets really act more like weather: a brief heat wave can become a massive storm in a matter of a few days, or even hours. Forecast re-imagines the basics of the financial world, with consequences that affect everyone."

• Shu-Heng Chen, "Agent-Based Computational Macroeconomics: A Survey" (pdf,235KB), In T. Terano, H. Deguchi, and K. Takadama, Meeting the Challenge of Social Problems via Agent-Based Simulation, post-proceedings of the Second International Workshop of Agent-Based Approaches in Economic and Social Complex Systems, New York: Springer, 2003, pp. 141-170.

  Abstract: "While by all standards the macroeconomic system is qualified to be a complex adaptive system, mainstream macroeconomics is not capable of demonstrating this feature. Recent applications of agent-based modeling to macroeconomics define a new research direction, which demonstrates how the macroeconomic system can be modeled and studied as a complex adaptive system. This paper shall review the development of agent-based computational modeling in macroeconomics."

• David Colander and Roland Kupers, Complexity and the Art of Public Policy: Solving Society's Problems from the Bottom Up (Amazon Book Site), Princeton University Press, 25 May 2014.

  Abstract: "...Unfortunately, economists' policy models...are stuck in either a market fundamentalist or government control narrative. While these standard narratives are useful in some cases, they are damaging in others, directing thinking away from creative, innovative policy solutions. (This book) outlines a new, more flexible policy narrative, which envisions society as a complex evolving system that is uncontrollable but can be influenced."

• John C. Driscoll (Federal Reserve Board) and Steinar Holden (University of Oslo), Behavioral Economics and Macroeconomic Models (pdf,559KB), Working Paper, Latest Version: 7 April 2014

  Abstract: "Over the past 20 years, macroeconomists have incorporated more and more results from behavioral economics into their models. We argue that doing so has helped fixed deficiencies with standard approaches to modeling the economy—for example, the counterfactual absence of inertia in the standard New Keynesian model of economic fluctuations. We survey efforts to use behavioral economics to improve some of the underpinnings of the New Keynesian model—specifically, consumption, the formation of expectations and determination of wages and employment that underlie aggregate supply, and the possibility of multiple equilibria and asset price bubbles. We also discuss more broadly the advantages and disadvantages of using behavioral economics features in macroeconomic models."

• John Foster, "Why is Economics Not a Complex Systems Science" (pdf,132KB), Discussion Paper No. 336, School of Economics, University of Queensland, December 2004.

  Abstract: The author notes that current economic theory "is ahistorical and outcome focused, i.e., it does not deal with economic processes." The author then argues that "all parts of the economy are inhabited by complex adaptive systems operating in complicated historical contexts and that this should be acknowledged at the core of economic analysis." The author then revisits the macroeconomics of John Maynard Keynes "to provide an example of how some economists in earlier times were able to provide powerful economic analysis that was based on intuitions that we can now classify as belonging to a complex systems perspective on the economy."

• Roman Frydman and Edmund S. Phelps (Eds.), Rethinking Expectations: The Way Forward for Macroeconomics, Princeton University Press, January 2013.

  Abstract: "This book originated from a 2010 conference marking the fortieth anniversary of the publication of the landmark `Phelps volume,' Microeconomic Foundations of Employment and Inflation Theory, a book that is often credited with pioneering the currently dominant approach to macroeconomic analysis. However, in their provocative introductory essay, Roman Frydman and Edmund Phelps argue that the vast majority of macroeconomic and finance models developed over the last four decades derailed, rather than built on, the Phelps volume's "microfoundations" approach. Whereas the contributors to the 1970 volume recognized the fundamental importance of according market participants' expectations an autonomous role, contemporary models rely on the rational expectations hypothesis (REH), which rules out such a role by design. The financial crisis that began in 2007, preceded by a spectacular boom and bust in asset prices that REH models implied could never happen, has spurred a quest for fresh approaches to macroeconomic analysis. While the alternatives to REH presented in Rethinking Expectations differ from the approach taken in the original Phelps volume, they are notable for returning to its major theme: understanding aggregate outcomes requires according expectations an autonomous role. In the introductory essay, Frydman and Phelps interpret the various efforts to reconstruct the field -- some of which promise to chart its direction for decades to come."

• E. Gaffeo, M. Catalano, F. Clementi, D. Delli Gatti, M. Gallegati, A. Russo, "Reflections on Modern Macroeconomics: Can We Travel Along a Safer Road?" (pdf,227KB), Physica A, Volume 382, 2007, 89-97.

  Abstract: "In this paper we sketch some reflections on the pitfalls and inconsistencies of the research program -- currently dominant among the profession -- aimed at providing microfoundations to macroeconomics along a Walrasian perspective. We argue that such a methodological approach constitutes an unsatisfactory answer to a well-posed research question, and that alternative promising routes have been long mapped out but only recently explored. In particular, we discuss a recent agent-based, truly non-Walrasian macroeconomic model, and we use it to envisage new challenges for future research."

• Domenico Delli Gatti, Saul Desiderio, Edoardo Gaffeo, Pasquale Cirillo, and Mauro Gallegati, Macroeconomics from the Bottom Up (JASSS Review), Springer-Verlag, Berlin, 2011.

  Abstract: The authors present a critique of mainstream macroeconomics, focusing primarily on methodological issues. Agent-based macroeconomic modeling is proposed as a better approach for understanding real-world macroeconomic events, such as financial crises.

• Michal Gradzewicz, Krzysztof Makarski, and Joanna Tyrowicz, "Do we Really Need to Start from Scratch?" (pdf,163KB), Working Paper, Narodowy Bank Polski, 2010.

  Abstract: This paper reviews the state-of-the-art macroeconomic theory literature from the perspective of its usefulness in the context of the 2007-2009 economic crises.

• Roger Guesnerie, "Expectional Coordination Failures and Market Outcomes' Volatility" (pdf,233KB), Chapter 1 (pp. 49-67) in Roman Frydman and Edmund S. Phelps (Eds.), Rethinking Expectations: The Way Forward for Macroeconomics, Princeton University Press, 2013.

  Abstract: "The first part of this text comes back on the standard economic viewpoint on expectational coordination, a viewpoint that the recent events have challenged. The second part reviews the existing directions for a critical assessment of the rational expectations hypothesis. The third part shows how such a critical assessment, along the lines of the so-called “eductive” learning approach, radically modifies our view of three key problems : the economic benefit of speculation, the informational efficiency of markets and, last but not least, the ability of long horizon agents to anticipate the future. The fourth part stresses the established basis as well as the future challenges of the discussed lines of thinking."

• Steinar Holden, "Implications of Insights from Behavioral Economics for Macroeconomic Models" (pdf,798KB), Norges Bank Research, October, 2012.

  Abstract: "The last 20 years, the importance of a number of behavioral features has been widely accepted within economics, and they are now regularly included in standard macro models. Where has this development led us? I argue that the insights from behavioral economics have led to important progress in our understanding of macroeconomic phenomena. One of the most important is the effect of fairness considerations on wages and employment relationships. Another important insight is that most or all individuals are affected by various behavioral features, which should be taken into account in the design of saving plans and pension schemes. A third insight is that plausible macro models provide large scope for important effects of sentiments and psychological factors. Future research should follow different routes, like incorporating behavioral features in standard models, improving estimated empirical models, and learning from case studies and historical episodes."

• Cars Hommes, "Behavioral Rationality and Heterogeneous Expectations in Complex Economic Systems", Cambridge University Press, January 2013. Introductory materials (including Chapter 1) can be viewed (here,6MB).

  Abstract: "Recognising that the economy is a complex system with boundedly rational interacting agents, the book presents a theory of behavioral rationality and heterogeneous expectations in complex economic systems and confronts the nonlinear dynamic models with empirical stylized facts and laboratory experiments. ... The complexity tools - bifurcations, chaos, multiple equilibria - discussed in this book will help students, researchers and policy makers to build more realistic behavioral models with heterogeneous expectations to describe financial market movements and macro-economic fluctuations, in order to better manage crises in a complex global economy."

• Peter Howitt, "Macroeconomics with Intelligent Autonomous Agents" (pdf,192KB), In Macroeconomics in the Small and the Large: Essays on Microfoundations, Macroeconomic Applications and Economic History in Honor of Axel Leijonhufvud, edited by Roger Farmer. Cheltenham: Edward Elgar, 2008. (Source code for the C++ program used in the paper is available here (textfile).

  Abstract: The author asks how macroeconomic modelers might come to grips with one of the most salient aspects of macroeconomic life: that people must behave in an economic environment that they don’t understand, and that they know they don’t understand. He argues that, if macroeconomists are to study an economy's coordination mechanisms, then they must permit their agents to be intelligent, autonomous, interacting entities who endeavor to behave in accordance with good robust rules.

• Alan P. Kirman, Complex Economics: Individual and Collective Rationality, The Graz Schumpeter Lectures, Routledge, New York, NY, 2011.

  Abstract: This book stresses three themes -- contagion, networks, and trust -- as necessary components for understanding the functioning of a modern economy in both normal and crisis modes. The author argues that coordination rather than efficiency is the central problem of economics.

• Alan P. Kirman, "The Economic Crisis is a Crisis for Economic Theory" (pdf,149KB), CESifo Economic Studies Conference on "What's Wrong With Modern Macroeconomics," Munich, November 6-7, 2009.

  Abstract: Reflections on the origins of the 2007-2009 financial crisis and its implications for economic theory, in particular macroeconomic theory.

• Alan P. Kirman, "Whom or What Does the Representative Agent Represent?" (pdf,2.2MB), Journal of Economic Perspectives 6(2), Spring 1992, 117-136.

  Abstract: This paper explains why the reduction of the behavior of a group of heterogeneous agents to a single utility-maximizing representative agent -- even if the heterogeneous agents are all themselves utility maximizers -- is not simply an analytical convenience, as often explained. Rather, it is an unjustified assumption that leads to conclusions that are usually misleading and often wrong.

• Wim Meeusen, "Wither the Microeconomic Foundations of Macroeconomic Theory?" (pdf,218KB), Universiteit Antwerpen, June 2010.

  Abstract: The author provides an exceptionally thoughtful retrospective of the developments in macroeconomic and monetary policy theorizing since Keynes, with a particular focus on microfoundations issues.

• Leigh Tesfatsion, Agent-Based Computational Economics: A Constructive Approach to Economic Theory (pdf preprint,253KB), pp. 831-880 in Leigh Tesfatsion and Kenneth L. Judd (eds.), Handbook of Computational Economics, Volume 2: Agent-Based Computational Economics (Table of Contents), Handbooks in Economics Series, North-Holland/Elsevier, the Netherlands, Spring 2006.

  Abstract: This chapter explores the potential advantages and disadvantages of ACE for the study of economic systems. General points are concretely illustrated using an ACE model of a two-sector decentralized market economy. Six issues are highlighted: Constructive understanding of production, pricing, and trade processes; the essential primacy of survival; strategic rivalry and market power; behavioral uncertainty and learning; the role of conventions and organizations; and the complex interactions among structural attributes, behavior, and institutional arrangements.

• Leigh Tesfatsion, "Agent-Based Computational Modeling and Macroeconomics" (pdf,148KB), Economic Report 05023, Iowa State University, July 2005.

  Abstract: Agent-based Computational Economics (ACE) is the computational study of economic processes modeled as dynamic systems of interacting agents. This essay discusses the potential of ACE modeling tools for the study of macroeconomic systems. Points are illustrated using an ACE model of a two-sector decentralized market economy.

  Note: This essay is an abbreviated preliminary version of the above handbook chapter with a stress on macroeconomic issues.

• Leigh Tesfatsion, Macroeconomic Theory Course Materials (Masters-Level):
  1. "Introduction to Walrasian General Equilibrium Modeling" (pdf,122KB)
  2. "NonWalrasian Equilibrium: Illustrative Examples" (pdf,187KB)
  3. "Universal Principles for Decentralized Market Economies?" (pdf,18KB)

• Frank Westerhoff, "The Use of Agent-Based Financial Market Models to Test the Effectiveness of Regulatory Policies" (pdf,1.3MB), Jahrbücher für Nationalökonomie und Statistik (Journal of Economics and Statistics), Vol. 228, 2008, 195-227.

  Abstract: "Models with heterogeneous interacting agents have proven to be quite successful in the past. For instance, such models are able to mimic the dynamics of financial markets quite well. The goal of our paper is to explore whether this approach may offer new insights into the working of certain regulatory policies such as transaction taxes, central bank interventions and trading halts. Although this strand of research is rather novel, we argue that agent-based models may be used as artificial laboratories to improve our understanding of how regulatory policy tools function."

Other Readings of Interest

• George Akerlof and Robert J. Shiller, Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism, Princeton University Press, 2009.

  Note: A short summary of the theme of this book, which provides the essence of George Ackerlof's 2009 T. W. Schultz Memorial Address at the 2009 ASSA meeting in San Francisco in January 2009, can be obtained here (pdf,21KB).

• George A. Akerlof, "Behavioral Macroeconomics and Macroeconomic Behavior", The American Economic Review, Volume 92, No. 3, June 2002, pages 411-433.

  Note: This is a revised version of the Nobel Lecture Akerlof delivered in Sweden on December 8, 2001.

• Masanao Aoki and Hiroshi Yoshikawa, Editors, Reconstructing Macroeconomics, special Issue, Economics: The Open-Access Open-Assessment E-Journal, 2009. on-line.

  Abstract: "Having sound `micro foundations for macroeconomics' has been long taken as building sophisticated optimization of an individual economic agent into a macro model. Thus, the `micro-founded' macroeconomics today begins with optimization of the representative consumer. In stark contrast to this main-stream approach in economics, it is widely recognized in natural sciences such as physics, chemistry, biology, and ecology, that a different approach is necessary when we analyze macro system consisting of a large number of micro units. The guiding principle there is that precise behavior of micro unit is irrelevant; we must resort to statistical approach to macro system as a whole. Why not in macroeconomics? The co-editors of the special issue advocated this idea in their book entitled Reconstructing Macroeconomics, Cambridge University Press, 2007. (This issue includes) papers that are intrinsically probabilistic, that is, based broadly on the principle of statistical physics. Key words such as power-law (Pareto-Zipf-Gibrat law), and econophysics may give you some idea (of the contents)."

• Robert Clower and Peter Howitt, "Taking Markets Seriously: Groundwork for a Post Walrasian Macroeconomics", Chapter 2 (pp. 21-37) in David Colander (ed.), Beyond Microfoundations: Post Walrasian Macroeconomics, Cambridge University Press, Cambridge, UK, 1996.

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

  Abstract: "This book provides state-of-the-art perspectives on macro theory from many of the world's leading theorists and methodologists. (It is suitable) as a course book or supplementary textbook in graduate macroeconomics. (The book also) includes a historical section that surveys the development of macroeconomics."

• Paul De Grauwe, "Top-Down Versus Bottom-Up Macroeconomics" (pdf,371KB), CESifo Conference, Munich, November 6-7, 2009.

  Abstract:"I distinguish two types of macroeconomic models. The first type are top-down models in which some or all agents are capable of understanding the whole picture and use this superior information to determine their optimal plans. The second type are bottom-up models in which all agents experience cognitive limitations. As a result, these agents are only capable of understanding and using small bits of information. These are models in which agents use simple rules of behavior. These models are not devoid of rationality. Agents in these models behave rationally in that they are willing to learn from their mistakes. These two types of models produce a radically different macroeconomic dynamics. I analyze these differences."

• Domenico Delli Gatti, Edoardo Gaffeo, Mauro Gallegati, Gianfranco Giulioni, and Antonio Palestrini, Emergent Macroeconomics: An Agent-Based Approach to Business Fluctuations, Springer Publishers, Series: New Economic Windows, 2008, XII, 114 pp., 30 illus., Hardcover ISBN: 978-88-470-0724-6, see also a (2006 Preprint,pdf,2.1MB)

  Abstract (From the Publisher): "This book contributes substantively to the current state-of-the-art of macroeconomics by providing a method for building models in which business cycles and economic growth emerge from the interactions of a large number of heterogeneous agents. Drawing from recent advances in agent-based computational modeling, the authors show how insights from dispersed fields like the microeconomics of capital market imperfections, industrial dynamics and the theory of stochastic processes can be fruitfully combined to improve our understanding of macroeconomic dynamics."

• John Duffy, Macroeconomics: A Survey of Laboratory Research (pdf,885KB), 2008, Chapter prepared for the Handbook of Experimental Economics Vol. 2, J. Kagel and A.E. Roth, Eds.

  Abstract: "This chapter surveys laboratory experiments addressing macroeconomic phenomena. The first part focuses on experimental tests of the microfoundations of macroeconomic models discussing laboratory studies of intertemporal consumption/savings decisions, time (in)consistency of preferences and rational expectations. Part two explores coordination problems of interest to macroeconomists and mechanisms for resolving these problems. Part three looks at experiments in specific macroeconomic sectors including monetary economics, labor economics, international economics as well-as large scale, multi-sector models that combine several sectors simultaneously. The final section addresses experimental tests of macroeconomic policy issues."

• John Duffy, Experimental Macroeconomics (pdf,119KB), August 2006, Prepared for the New Palgrave Dictionary of Economics, 2nd edition.

  Abstract: This Palgrave entry provides a brief overview of experimental macroeconomics, a subfield of experimental economics that makes use of controlled laboratory methods to understand aggregate economic phenomena and to test the specific assumptions and predictions of macroeconomic models.

• Joshua Epstein and Robert Axtell, Growing Artificial Societies: Social Science from the Bottom Up, The MIT Press, Cambridge, MA, 1996.

  Note: A review (pdf,43KB) of this monograph is given by L. Tesfatsion in the Journal of Economic Literature, Vol. XXXVI, March 1998, 233-234.

• Roman Frydman & Michael D. Goldberg, Beyond Mechanical Economics: Asset Price Swings, Risk, and the Role of the State, Princeton University Press, 2011, 285 pp.

  Abstract: "In (this book) Frydman and Goldberg show how the failure to abandon (the assumption that markets act mechanically and economic change is fully predictable) hinders our understanding of how markets work, why price swings help allocate capital to worthy companies, and what role government can and can't play."

• Roman Frydman & Michael D. Goldberg (Foreword by Edmund S. Phelps), Imperfect Knowledge Economics: Exchange Rates and Risk, Princeton University Press, 2007, 368 pp.

  Abstract: "Frydman and Goldberg offer a long-overdue response to the shortcomings of conventional economic models. Drawing attention to the inherent limits of economists' knowledge, they introduce a new approach to economic analysis: Imperfect Knowledge Economics (IKE). IKE rejects exact quantitative predictions of individual decisions and market outcomes in favor of mathematical models that generate only qualitative predictions of economic change. Using the foreign exchange market as a testing ground for IKE, this book sheds new light on exchange-rate and risk-premium movements, which have confounded conventional models for decades."

• Blake LeBaron, "Active and Passive Learning in Agent-Based Financial Markets" (pdf,125KB), Working Paper, Brandeis University, June 2010.

  Abstract: "This short note compares and contrasts two forms of learning which are present in most agent-based financial markets. First, passive learning refers to a form of "as if rationality" where wealth accumulates on strategies which have done relatively well. Second, active learning refers to the active switching of agents across strategies. Most heterogeneous agent markets contain some form of both these types of learning. From what we know so far the dynamics of each may be quite different, and may yield a rich and complex joint dynamic."

• Vernon L. Smith, Rationality in Economics: Constructivist and Ecological Forms, Cambridge University Press, New York, 2008

  Abstract: "The principal findings of experimental economics are that impersonal exchange in markets converges in repeated interaction to the equilibrium states implied by economic theory, under information conditions far weaker than specified in the theory. In personal, social, and economic exchange, as studied in two-person games, cooperation exceeds the prediction of traditional game theory. This book relates these two findings to field studies and applications and integrates them with the main themes of the Scottish Enlightenment and with the thoughts of F. A. Hayek."

Software/Toolkits, Demos, and Models

• Annotated list of pointers to ACE/CAS General Software and Toolkits

• Annotated list of pointers to ACE/CAS Computational Laboratories and Demonstration Software

• The ACE Dynamic Macroeconomic Game is a C++ implementation of the ACE computational platform developed in Sinitskaya and Tesfatsion (JEDC, 2015) for the study of macroeconomic systems as locally-constructive sequential games. Consumer and firm learning methods can range from simple reactive reinforcement to sophisticated anticipatory learning algorithms for the approximate achievement of intertemporal objectives.

• The Java Macro Agent-Based (JMAB) Programming Tool Suite, developed by Allesandro Caiani and Antoine Godin, is explicitly designed for the development of agent-based stock-flow consistent (AB-SFC) models. It provides a flexible and highly modular computational framework incorporating general procedures to check the stock-flow consistency of modeled processes at the macro, meso, and micro levels. For example, it has been used to handle heterogeneous real and financial stocks in agents' balance sheets as well as the representation of commercial and financial networks; see Caiani et al. (JEDC, 2016).

• Quamrul Ashraf, Boris Gershman, and Peter Howitt, "Banks, Market Organization, and Macroeconomic Performance: An Agent-Based Computational Analysis" (pdf,414KB), Cleveland Federal Reserve Bank Conference, revised April 2010, with accompanying C++ software (zip,77KB).

• Herbert Dawid, Simon Gemkow, Philipp Harting, Sander van der Hoog, and Michael Neugart have developed the Eurace@Unibi Model, an agent-based spatial modeling of a closed macroeconomy that provides a framework for economic policy analysis as well as for the examination of generic macroeconomic research questions. Documentation, source code, a user manual, publications, and sample simulation output can be found at the above site.

• Gregor Böhl, Sander van der Hoog, Philipp Harting, Simon Gemkow, and Herbert Dawid have developed the ETACE Virtual Appliance, a suite of programmes to facilitate the design, generation, running, and analyzing of agent-based simulations, including the Eurace@Unibe Model and FLAME (Flexible Large-scale Agent Modelling Environment).

• J. Doyne Farmer, "CRISIS (Complexity Research Initiative for Systematic Instabilities): Vision, Status, Plans, and Questions" (pdf,679KB), European Commission. CRISIS is an extensible open source software library (MASON/Java) of standardized building blocks for the construction of agent-based macroeconomic models. The purpose is to facilitate the modeling of interactions between real and financial sectors in a macroeconomy for the purpose of studying policy tools for central banks.

• The ICEACE Project is devoted to the development of an agent-based model and simulator of the Icelandic economy.

• JAMEL (Java Agent-based MacroEconomic Laboratory), developed by Pascal Seppecher (GREQAMB), is a cross-platform macroeconomic simulator developed in Java. Applications to date include the study of macroeconomic systems with endogenous money, with productivity shocks, with expenditure shocks, with a flexible labor market, and with a minimum wage. [NOTE: The first time this page is opened, there is a delay due to the loading of a Java applet.]

• Marc Oeffner, "Agent-Based Keynesian Macroeconomics" (pdf, 3.4MKB), Dissertation, Julius-Maximilians-Universität Würzburg, Germany, September 2008.

  Abstract: The 61-page introduction to this thesis provides the most comprehensive survey to date of the existing and potential uses of ACE modeling tools for the development and study of macroeconomic systems. The final chapters of this thesis present, implement, validate, and study a provide a proof-of-concept monetary macroeconomic model using the SeSAm multi-agent simulation environment. Complete code for this SeSAm implementation can be obtained in a zip file (39MB) available here.

• Participants in the project EOS: Economics Via Object-oriented Simulation under the direction of Ken Steiglitz (Computer Science, Princeton University) have developed a general, extensible, and hierarchical framework for economic simulation in Java. The goal is to have this software be a "starting point for an open-source project that can demonstrate fundamental economic principles in concrete terms, and, ultimately, become a testbed for evaluating policies in realistically large and complex models of whole economies." The code developed to date, together with documentation, can be downloaded from the above project site.

• The PlatBox Project, previously known as the Boxed Economy Project, is an agent-based computer software platform for the simulation of macroeconomies developed by researchers at the Iba Laboratory at Keio University, Japan. The main purpose of the PlatBox Project is to permit researchers to study, understand, and form predictions for real economic systems. Currently, the project is organized by Takashi Iba (Keio University) and Nozomu Aoyama. The PlatBox Simulator and Component Builder are currently offered only in Japanese; for details, visit here. However, English versions are expected to be out soon.

Research Groups and Sites

• Complexity Research Initiative for Systematic Instabilities (CRISIS) is a consortium of universities, private firms and policymakers that aims to build a new model of the economy and financial system that is based on how people and institutions actually behave. It was set up in the wake of the global financial crisis that showed that existing models that had been adequate for the good times were utterly inadequate for predicting major crises.

• Under the direction of Roger Guesnerie (Collége de France, Paris), a group of critics of the Rational Expectations Hypothesis (REH), notably in the study of financial markets and macroeconomies, has come together to organize the International Network on Expectational Coordination (INEXC). The first objective of the INEXC is to provide support for the dissemination of knowledge through conferences, workshops, and exchanges of visitors. The second objective is to attract and support the work of younger colleagues who wish to pursue alternative approaches to expectational coordination issues, particularly high-risk high-expected return approaches. A more detailed description of purpose for INEXC can be found here.

• The Rebuilding Macroeconomics project is funded by the Economic and Social Research Council, based in the United Kingdom. The stated long-term aim of the project is to transform macroeconomics back into a policy relevant social science through the support of interdisciplinary research and new methods of macroeconomic analysis.

  The Rebuilding Macroeconomics project interprets economies as consisting of evolving networks of agents who interact to interpret a world of unfolding uncertainty. The modeling of economies should thus entail a realistic portrayal of human social interaction to understand how economic systems evolve dynamically over time. The phenomena that emerge from such models – growth, cycles, crashes, technological revolutions and climate degradation – are examples of real-world macro phenomena that project members seek to understand.

  To encourage new research in macroeconomics from a complexity perspective, the Rebuilding Macroeconomics project is hosting a competition seeking original, innovative and important research papers. This must be work that has not previously been circulated or published. The first prize will be c.$16,000 (depending on the exchange rate). Authors must state clearly which important real-world macroeconomic question they are addressing, and how their analysis provides insight and understanding beyond standard methods of analysis. Applicants are encouraged to prioritise insight, exposition and policy relevance. Applications are particularly welcome from young scholars. The competition rules can be found here.

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