Non-Self-Averaging in Macroeconomic Models: A Criticism of Modern Micro-Founded Macroeconomics

22 Pages Posted: 6 Dec 2010

See all articles by Masanao Aoki

Masanao Aoki

University of California, Los Angeles (UCLA) - Department of Economics

Hiroshi Yoshikawa

Rissho University

Date Written: 2007

Abstract

Using a simple stochastic growth model, this paper demonstrates that the coefficient of variation of aggregate output or GDP does not necessarily go to zero even if the number of sectors or economic agents goes to infinity. This phenomenon known as non-self-averaging implies that even if the number of economic agents is large, dispersion can remain significant, and, therefore, that we can not legitimately focus on the means of aggregate variables. It, in turn, means that the standard microeconomic foundations based on the representative agent has little value for they are expected to provide us with accurate dynamics of the means of aggregate variables. The paper also shows that non-self-averaging emerges in some representative urn models. It suggests that non-self-averaging is not pathological but quite generic. Thus, contrary to the main stream view, micro-founded macroeconomics such as a dynamic general equilibrium model does not provide solid micro foundations.

Keywords: Micro foundations, Macroeconomics, Non-self averaging phenomena, Power laws

Suggested Citation

Aoki, Masanao and Yoshikawa, Hiroshi, Non-Self-Averaging in Macroeconomic Models: A Criticism of Modern Micro-Founded Macroeconomics (2007). Economics Discussion Paper No. 2007-49, Available at SSRN: https://ssrn.com/abstract=1719949 or http://dx.doi.org/10.2139/ssrn.1719949

Masanao Aoki (Contact Author)

University of California, Los Angeles (UCLA) - Department of Economics ( email )

Box 951477
Los Angeles, CA 90095-1477
United States

Hiroshi Yoshikawa

Rissho University ( email )

4-2-16, Osaki, Shinagawa-ku
Tokyo 141-8802
Japan
+81334927529 (Phone)

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