Modeling Aggregate Behavior and Fluctuations in Economics: Stochastic Views of Interacting Agents

Modeling Aggregate Behavior and Fluctuations in Economics: Stochastic Views of Interacting Agents

Modeling Aggregate Behavior and Fluctuations in Economics: Stochastic Views of Interacting Agents

Modeling Aggregate Behavior and Fluctuations in Economics: Stochastic Views of Interacting Agents

Synopsis

This book analyzes how a large but finite number of agents interact, and what sorts of macroeconomic statistical regularities or patterns may evolve from these interactions. By keeping the number of agents finite, the book examines situations such as fluctuations about equilibria, multiple equilibria and asymmetrical cycles of models which are caused by model states stochastically moving from one basin of attraction to another. All of these are not tractable using traditional deterministic modeling approaches. The book also discusses how agents may form clusters with stationary distributions of cluster sizes. These have important applications in analyzing volatilities of asset returns.

Excerpt

This book is a sequel to Aoki (1996) in the loose sense that it is motivated by a similar set of considerations to its predecessor and shares some of the same objectives. It records my efforts, since the publication of that book, at evaluating and reformulating macroeconomic models that are employed by the mainstream economic profession. in this book, a stochastic point of view is taken to construct models for finite numbers of interacting agents. in other words, the book emphasizes models that focus on economic phenomena that involve stochastic laws, or stochastic regularities that govern economic phenomena.

To make this book more readily accessible to traditionally trained economists and graduate students in economics, it is more narrowly focused than my previous one, and it attempts to establish better links with some well-known models in the macroeconomic literature. This book is motivated by my strong desire to persuade some traditionally trained economists to phrase their questions in stochastic ways and apply some of the methods presented in it to their work.

Mainstream economists and graduate students of economics may wonder why to use stochastic models or what additional or new insights they yield or, if stochastic laws in economics are so useful, why they have not heard of them before. a short answer is that models with finite numbers of agents in appropriate stochastic contexts reveal interesting economic phenomena that are invisible in deterministic models with infinite numbers of (representative) agents. Traditional models wash out some important information about economies, but one would not know them. This finitary and stochastic approach provides more information about the economy than deterministic economic laws permit.

There are many areas of economics to which my approach applies. in speaking of inflation and unemployment, Tobin, in his presidential address at the American Economic Association Meeting in 1971, came close to describing stochastic laws and aggregate dynamics and fluctuations (in terms of Fokker–Planck equations, say), according to my way of modeling, when he said, “… stochastic macro-equilibrium, stochastic, because random intersectoral shocks keep individual labor markets in diverse states of disequilibrium . . .

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