"This paper is an exploratory analysis of the role that banks play in supporting what Jevons called the mechanism of exchange. It considers a model economy in which exchange activities are facilitated and coordinated by a self-organizing network of entrepreneurial trading firms. Collectively these firms play the part of the Walrasian auctioneer, matching buyers with sellers and helping the economy to approximate equilibrium prices that no individual is able to calculate. Banks affect macroeconomic performance in this economy because their lending activities facilitate entry of trading firms and also influence their exit decisions. Both entry and exit have conflicting effects on performance, and we resort to computational analysis to understand how these conflicting effects are resolved. Our analysis sheds new light on the conflict between micro prudential bank regulation and macroeconomic stability; under some circumstances the economy performs better when bank regulation pays less attention to micro prudence (ie when capital adequacy ratios are lower and allowable loan-to-value ratios are higher). Related to this, the analysis draws an important difference between "normal" performance of the economy and "worst-case" scenarios; the micro prudence conflicts with macro stability only in the worst-case scenarios."This is the first of many attempts to find the right paper or combination of papers...so if this doesn't fit your fancy...don't worry I will find others...
Tuesday, August 3, 2010
Complex Systems Paper of the Day...
Ashraf et al. " Banks, Market Organization, and Macroeconomic Performance: An Agent Based Approach." Following an excellent suggestion from James, this is my first attempt to dig out a simple agent-based model that would be a useful alternative to DSGE. C++ code used in the model can be found here. As mentioned by the authors this model is still probably too stylized too be useful for policy...but for now I am going to try to err on the side of simplicity and then look to build towards more policy oriented models. See abstract below...
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I was actually thinking of something nice and closed form. But then thinking about it I realise that I am probably being a little foolish. There are lots of cases in Micro where heterogeneities cause fundamentally different outcomes. The obvious being Assymetric Information. JHM's work is largely on Assymetric information and its effect on the money market and the economy at large. This predicts very different outcomes to anything in DSGE (I make this very certain statement based upon almost no knowledge of the DSGE literature). Then rational herding does too, I think.
ReplyDeleteI would like to collect up examples of non-behavioural Micro insights that have not/cannot be incorporated into DSGE. See how convincing it is that they would imply very different outcomes and then ask pro DSGE people, e.g Sevi, whether they think these things are problems for Macro and what they think should be done about it. If they have a viable method for approaching these problems within the standard framework then we shouldn't be so dismissive. If not then we can be more certain that we are on the right path ourselves in going off the beaten track (or less beaten).
James, I think this would be an excellent idea.
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