Macroeconomic Relaxation: Adjustment Processes of Hierarchical Economic Structures

Abstract:     
We show how time-dependent macroeconomic response follows from microeconomic dynamics using linear response theory and a time-correlation formalism. This theory provides a straightforward approach to time-dependent macroeconomic model construction that preserves the heterogeneity and complex dynamics of microeconomic agents. We illustrate this approach by examining the relationship between output and demand as mediated by changes in unemployment, or Okun's law. We also demonstrate that time dependence implies overshooting and how this formalism leads to a natural definition of economic friction.

Number of Pages in PDF File: 23

Keywords: Macroeconomic adjustment process, microeconomic dynamics, aggregation, anelastic relaxation, Okun's law, time-correlation formalism

JEL Classification: J21, E24, C31, A12, D50

working papers series