Macroeconomic Policy in DSGE and Agent-Based Models Redux: New Developments and Challenges Ahead

48 Pages Posted: 14 Apr 2016 Last revised: 13 Nov 2016

See all articles by Giorgio Fagiolo

Giorgio Fagiolo

Scuola Superiore Sant'Anna di Pisa - Laboratory of Economics and Management (LEM)

Andrea Roventini

Scuola Superiore Sant'Anna di Pisa - Laboratory of Economics and Management (LEM); Observatoire Fran├žais des Conjonctures Economiques (OFCE)

Date Written: November 11, 2016

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 heterogenous 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.

Keywords: Economic Policy, New Neoclassical Synthesis, New Keynesian Models, DSGE Models, Agent-Based Computational Economics, Agent-Based Models, Complexity Theory, Great Recession, Crisis

JEL Classification: B41, B50, E32, E52

Suggested Citation

Fagiolo, Giorgio and Roventini, Andrea, Macroeconomic Policy in DSGE and Agent-Based Models Redux: New Developments and Challenges Ahead (November 11, 2016). Available at SSRN: https://ssrn.com/abstract=2763735 or http://dx.doi.org/10.2139/ssrn.2763735

Giorgio Fagiolo

Scuola Superiore Sant'Anna di Pisa - Laboratory of Economics and Management (LEM) ( email )

Piazza Martiri della Liberta', 33-I-56127
Pisa
Italy

Andrea Roventini (Contact Author)

Scuola Superiore Sant'Anna di Pisa - Laboratory of Economics and Management (LEM) ( email )

Piazza Martiri della Liberta', 33-I-56127
Pisa
Italy

Observatoire Fran├žais des Conjonctures Economiques (OFCE)

69 Quai d'Orsay
Paris 75004
France

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
730
Abstract Views
2,687
rank
44,774
PlumX Metrics