No man is an island : the impact of heterogeneity and local interactions on macroeconomics dynamics

Mattia Guerini (1, 2) , Mauro Napoletano (2) , Andrea Roventini (2)

1 SSSUP - Scuola Universitaria Superiore Sant'Anna [Pisa]
2 OFCE - Observatoire français des conjonctures économiques (Sciences Po)

We develop an agent-based model in which heterogeneous firms and households interact in labor and good markets according to centralized or decentralized search and matching protocols. As the model has a deterministic backbone and a full-employment equilibrium, it can be directly compared to Dynamic Stochastic General Equilibrium (DSGE) models. We study the effects of negative productivity shocks by way of impulse-response functions (IRF). Simulation results show that when search and matching are centralized, the economy is always able to return to the full employment equilibrium and IRFs are similar to those generated by DSGE models. However, when search and matching are local, coordination failures emerge and the economy persistently deviates from full employment. Moreover, agents display persistent heterogeneity. Our results suggest that macroeconomic models should explicitly account for agents’ heterogeneity and direct interactions.

Keywords: Agent based model; Local interactions; Heterogeneous agents; DGSE Model; Agent based model

Domains: Humanities and Social Sciences; Economics and Finance

Mattia Guerini, Mauro Napoletano, Andrea Roventini. No man is an island : the impact of heterogeneity and local interactions on macroeconomics dynamics. Economic Modelling, 2018, 68, pp.82-95. ⟨10.1016/j.econmod.2017.05.004⟩. ⟨hal-03609582⟩