A Dissertation Submitted To The Doctoral School Of Economics And Management In Partial Fulfillment Of The Requirements For The Doctoral Degree In Economics And Management

Doctoral Thesis UNIVERSITY OF TRENTO CIFREM INTERDEPARTMENTAL CENTRE FOR RESEARCH TRAINING IN ECONOMICS AND MANAGEMENT DOCTORAL SCHOOL IN ECONOMICS AND MANAGEMENT THREE ESSAYS IN AGENT-BASED MACROECONOMICS A DISSERTATION SUBMITTED TO THE DOCTORAL SCHOOL OF ECONOMICS AND MANAGEMENT IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DOCTORAL DEGREE (PH.D.) IN ECONOMICS AND MANAGEMENT Giulia Canzian November 2009 ADVISORS DOCTORAL COMMITTEE Dott Edoardo Gaffeo Università degli Studi di Trento Prof Roberto Tamborini Università degli Studi di Trento Prof Richard Pomfret University of Adelaide Prof.ssa Roberta Raffaelli Università degli Studi di Trento Dott.ssa Laura Magazzini Università degli Studi di Verona Prof Raffaele Corrado Università degli Studi di Bologna Per chi viaggia in direzione ostinata e contraria Col suo marchio speciale di speciale disperazione E fra il vomito dei respinti muove gli ultimi passi Per consegnare alla morte una goccia di splendore, di umanità, di verità F DeAndrè To Bruno and Celide To my Family Abstract The dissertation is aimed at offering an insight into the agent-based methodology and its possible application to the macroeconomic analysis Relying on this methodology, I deal with three different issues concerning heterogeneity of economic agents, bounded rationality and interaction Specifically, the first chapter is devoted to describe the distinctive characteristics of agent-based economics and its advantages-disadvantages In the second chapter I propose a credit market framework characterized by the presence of asymmetric information between the banks and the entrepreneurs I analyze how entrepreneurs’ heterogeneity and the presence of Relationship Banking influences the macro properties of the designed system In the third chapter I work to take the core of Keynes’s macroeconomics into the computer laboratory, in the spirit of a counterfactual history of economic thought In particular, I devote much effort in the behavioural characterization of the three pillars of Keynes’s economics – namely the MEC, MPC and LP – relying on his clear refusal of perfect rationality in the decision making process The last chapter adds to the literature that assesses the impact of monetary policy under the hypothesis of agent’s bounded rationality Indeed, I design a quasi rational process through which inflation expectations are updated, and then I analyze how this hypothesis interacts with the efficacy of different monetary policy regimes Keywords Macroeconomics, Agent-based economics, Complex Adaptive System Contents INTRODUCTION AN INSIGHT INTO AGENT-BASED ECONOMICS WHAT ARE AGENT BASED MODELS? WHY AGENT BASED MODELS AND NOT DSGE FOR A MODERN MACROECONOMICS? THE AGENT–BASED NATURE OF THIS DISSERTATION 17 FIRM-BANK RELATIONSHIP AND THE MACROECONOMY: SOME COMPUTATIONAL EXPERIMENTS 21 INTRODUCTION 21 FINANCE AND THE ECONOMY 22 AN OVERVIEW ABOUT RELATIONSHIP BANKING 25 THE MODEL 27 4.1 Basic framework: the Symmetric Information case 27 4.1.1 Investment opportunities 27 4.1.2 Bank-firm interactions 29 4.2 Pure Asymmetric Information treatment 32 4.3 Relationship Banking treatment 35 SIMULATION RESULTS 36 5.1 Pure Asymmetric treatment versus Relationship Banking treatment 38 5.2 Robustness check 45 CONCLUSIONS 48 KEYNES IN THE COMPUTER LABORATORY.AN AGENT-BASED MODEL WITH MEC, MPC, LP 54 INTRODUCTION 54 UNCERTAINTY, ANIMAL SPIRITS AND MARKET SENTIMENT 57 PROTAGONISTS ON STAGE: MEC, MPC AND LP 60 3.1 The Marginal Efficiency of Capital 61 3.2 The Marginal Propensity to Consume 64 3.3 The Liquidity Preference 64 ANIMAL SPIRITS AND MARKET SENTIMENT AFTER KEYNES 65 AN ABM OF A KEYNESIAN ECONOMY 71 5.2 The Marginal Efficiency of Capital 72 5.2 The Marginal Propensity to Consume 73 5.3 The Liquidity Preference 75 5.5 Modelling Market Sentiment 77 SIMULATION RESULTS 79 6.1 Baseline 80 6.2 Market Sentiment in motion 81 6.3 Implementing the model with Unconditional Market Sentiment 83 6.4 Implementing the model with Endogenous Market Sentiment 88 6.5 Reproducing under-production and under-investment 90 CONCLUSIONS 92 INFLATION EXPECTATIONS AND MARKET SENTIMENT: SOME COMPUTATIONAL EXPERIMENTS 99 INTRODUCTION 99 A GENERAL OVERVIEW OF NEO CLASSICAL MONETARY POLICY THEORY 99 QUESTIONING RATIONAL EXPECTATIONS: THE LEARNING LITERATURE AND DEVELOPMENTS 103 INFLATION EXPECTATIONS AND MARKET SENTIMENT 106 THEORETICAL FRAMEWORK 109 SIMULATION RESULTS 114 i 6.1 The Old Regime versus the Modern regime 115 6.2 Flexible money supply rule 120 6.3 Changing the importance attached to inflation expectations 122 CONCLUSIONS 124 CONCLUSION 129 FURTHER RESEARCH 133 APPENDIX A 137 CHAPTER – FLOW DIAGRAM 137 APPENDIX B 141 CODES 141 ii iii Appendix B=zeros(a,T); vb=zeros(a,T); r=zeros(a,T); fallimenti=zeros(a,T); phi=0.2; %proportion of opportunistic entr d=0.5; %bargaining power parameter rai=((1+rbar)/((1-phi)*sigma))-(1/sigma); %int.unknown entrepreneurs rrb=d*(((1+rbar)/(sigma*(1-phi)))-(1/sigma))+(1-d)*(rbar/sigma); %RB int.rate %%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%% %Personal characteristics algorithm %%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%% for i=1:ceil(phi*a) wi(i,1)=1; end g=randperm(a); x=wi(g,1); wi(:,1)=x; %%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%% for i=1:a ain(i,1)=1; %initial wealth level l(i,1)=ain(i,1); %loan amount end for i=1:a B(i,1)=l(i,1)*(1+rai); end for i=1:a c=rand; if c>(1-sigma) y(i,1)=(1+rhob(i))*(2*ain(i,1)); %production vb(i,1)=rhob(i)*2*ain(i,1); %value added else y(i,1)=ain(i,1); vb(i,1)=0; end end for i=1:a pigreco(i,1)=y(i,1)-((1+rai)*l(i,1)); if wi(i,1)==0 %honest entrepreneurs if pigreco(i,1)>0 %who achieve positive profits b(i,1)=(1+rai)*l(i,1); %refund entirely the loan aif(i,1)=z*pigreco(i,1); else b(i,1)=ain(i,1); %otherwise, they refund the bank with the minimum possible amount, i.e., current period wealth aif(i,1)=0; end else b(i,1)=0; aif(i,1)=0;% opportunistic entrepreneurs don't meet their obligations at all end end %%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%% %First simulation period for SELF FINANCING ENTREPRENEURS %%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%% Ain=zeros(s,T); Aif=zeros(s,T); ys=zeros(s,T); vs=zeros(s,T); for i=1:s Ain(i,1)=1; c=rand; if c>(1-sigma) ys(i,1)=(1+rhos(i))*(Ain(i,1)); vs(i,1)=rhos(i)*Ain(i,1); Aif(i,1)=z*ys(i,1); else ys(i,1)=Ain(i,1); vs(i,1)=0; 148 %first period production Appendix Aif(i,1)=z*ys(i,1); end end Afb(1)=sum(aif(:,1)); Afs(1)=sum(Aif(:,1)); %%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%% %%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%% %%%%% MAIN LOOP %%%%%%%%%%%%%%%%%%%%%% %%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%% %%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%% for t=2:T %%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%% %Personal characteristics algorithm %%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%% x=find(b(:,t-1)(1-sigma) y(i,t)=(1+rhob(i))*(2*ain(i,t)); vb(i,t)=rhob(i)*2*ain(i,t); else y(i,t)=ain(i,t); vb(i,t)=0; 149 Appendix end end for i=1:a if wi(i,t)==0 %honest entrepreneurs pigreco(i,t)=y(i,t)-((1+r(i,t))*l(i,t)); if pigreco(i,t)>0 %who achieve positive profits b(i,t)=B(i,t); %refund entirely the loan aif(i,t)=z1*pigreco(i,t); else b(i,t)=ain(i,t); %otherwise, they refund the bank with the minimum possible amount, i.e., current period wealth aif(i,t)=0; end else b(i,t)=0; aif(i,t)=0;% opportunistic entrepreneurs don't meet their obligations at all end end %%%%%%%%%%%%%%%%%%%%%%%%%%%%% %Self financing entrepreneurs %%%%%%%%%%%%%%%%%%%%%%%%%%%%% for i=1:s Ain(i,t)=Aif(i,t-1); end for i=1:s c=rand; if c>(1-sigma) ys(i,t)=(1+rhos(i))*(Ain(i,t)); vs(i,t)=rhos(i)*Ain(i,t); Aif(i,t)=z*ys(i,t); else ys(i,t)=Ain(i,t); vs(i,t)=0; Aif(i,t)=z*ys(i,t); end end %%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%% %%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%% %isolate failing firms and compute their average initial wealth for i=1:a if pigreco(i,t)0.5; %inflation exp regulate dby past inflation dynamics if infl(t-1)infl(t-1) m(t)=m(t-1)*1.05; else m(t)=m(t-1)*0.95; end %%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%% R(t)=((mu/teta)*log(y(t)))-(log(m(t))/teta)+(log(P(t))/teta)+shock(t); LM r(t)=R(t)-exp_inf(t); %real interest rate q(t)=rho(t)/r(t); end time=1:1:350; %%SERIES' FILTERING [y_trend]=hpfilter(log(y(51:T)),100); [i_trend]=hpfilter(log(i(51:T)),100); [c_trend]=hpfilter(log(c(51:T)),100); [R_trend]=hpfilter(log(R(51:T)),100); [r_trend]=hpfilter(log(r(51:T)),100); %%DETRENDING SERIES y_cyc=log(y(51:T)')-y_trend; c_cyc=log(c(51:T)')-c_trend; i_cyc=log(i(51:T)')-i_trend; R_cyc=(log(R(51:T)))-R_trend; r_cyc=(log(r(51:T))')-r_trend; %%%VARIANCE sigma_iy=std(i_cyc)/std(y_cyc); sigma_cy=std(c_cyc)/std(y_cyc); st_dev_c=std(c_cyc); %std consumption 160 %traditional Appendix st_dev_i=std(i_cyc); %std investment st_dev_y=std(y_cyc); %std output st_dev_R=std(R_cyc); %std nominal rate st_dev_r=std(r_cyc); %std real rate st_dev_inf=std(infl(51:T)); %%%STATISTICS mean_inf=mean(infl(51:T)); median_inf=median(infl(51:T)); mean_y=mean(y(51:T)); max_inf=max(infl(51:T)); min_inf=min(infl(51:T)); 161 Tutti ogni tanto ci Perderemo nella nebbia, ma La passione per la verità Ci riporta in strada, come siamo diversi specchiati negli occhi della gente, poche fontane ridanno il nostro verde Siamo tutto ciò che amiamo, il resto è sovrastruttura F SdB My gratitude goes here to all the persons who helped me in completing this thesis, in many different ways Edoardo Gaffeo and Roberto Tamborini, I really have to thank them for all I have learned in writing this dissertation, and for guiding me towards method and originality All the people from CIFREM, in particular Dominique and Fabio P And the good and special friends I have met in the doctoral program, Francesca B and Francesca M From the department of Economics, Andrea Fracasso, for the really useful discussions and for his helpfulness Daniela, Sonia, Federico, Matteo, Sara, Claudio from OPES, for not being just colleagues but friends Silvia, Elena and Fabrizio from Emergency Trento for their precious friendship My dearest friends ever, I am what I am because I know I can count on them, Cinzia, Francesca and Monica My “new” family, Rosario, Iole and Carmela My family, Maurizio, Patrizia and Mattia, for their unconditional love and support, for having made me a happy child and a strong woman My uncle Guido, my aunt Lucia and Francesco Bruno and Celide, my grandparents, to whom this thesis is dedicated I cannot find the words to express what they have meant to me, but I know that I have completed this thesis because of their dignity and their strength, and I miss them so much And finally, Luigi The latest years have not been simple, and life has put me to test so many times I felt like a small boat in an enormous ocean, but my husband has been the light in the shadow and the harbour there to embrace me I’m freely going around through life, but when I look at his eyes I feel at home ... macroeconomy Since then, many authors have shown a general interest about the role of financial markets in the determination of aggregate real variables, and in particular in the role of financial... remain wealth constrained At the end of each period, Banking Financing entrepreneurs have to repay the loan, and in case of bad luck they can incur in failure, and exit the market, just because... situations agents collect all the possible information at which they have access and analyze it in order to find a reasonable guideline that could lead them to the final solution In such a framework,