Development and Underdevelopment in the History of Economic Thought

The Microfoundations of Macroeconomics: A New Assessment in the Light of Agent Based Macroeconomics

Delli Gatti Domenico, Università Cattolica del Sacro Cuore

In this paper I revisit the debate over the microfoundations of macroeconomics in the light of current developments in Agent Based Macroeconomics. First, I will claim that indeed “macro needs micro”, a proposition that -- at the time of the original debate -- was supported by neo-classical authors and rejected by Keynesian authors. Second, I will claim that the appropriate microfoundations for contemporary macroeconomics should recognize the nature of complex adaptive system of the macroeconomy. This characterization was not available to both sides at the time of the original debate. On the basis of this premise, over the last two decades a substantial literature has grown on Agent Based Macroeconomics. Third, I will show that – contrary to the conventional wisdom -- the micro-foundations of the main Macroeconomic Agent Based Models (MABMs) rely in a non-negligible way on New Keynesian insights. In many instances behavioral ruled coded into MABMs can be interpreted as streamlined or reduced form variants of optimal rules derived from “first principle” in the New Keynesian literature. This is particularly true in the case of the AB sub-models of borrower/lender interaction (a core element of all MABMs), which rely heavily on insights coming from the financial frictions literature. The current MABMs, however, do not incorporate in any way the notions of market clearing and “equilibrium”. Finally, I will advertise a line of research on Hybrid MABMs, i.e. streamlined MABMs which rely, at least in part on the notion of macroeconomic equilibrium. I will show a specific example of such a Hybrid MABM and discuss its macro-dynamic properties. Macroeconomic Equilibrium in H-MABMs allows to extract a clear chain of events following a shock – e.g. a fiscal policy shock -- from the complicated and untraceable agents’ interactions which generate the emergent properties of a MABM. Since MABMs are frequently charged with being “black boxes”, the advantage of the hybrid methodol

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Keywords: Microfoundations, Agent based macroeconomics