No Man is an Island: The Impact of Heterogeneity and Local Interactions on Macroeconomic Dynamics
33 Pages Posted: 1 Jun 2016
Date Written: May 31, 2016
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, DSGE Model
JEL Classification: E03, E32, E37
Suggested Citation: Suggested Citation