Disequilibrium and Agent-Based Modelling

OECD-ECLAC New Tools Workshop

Antoine MandelUniversity Paris 1 Panthéon-Sorbonne, Paris School of Economics

May 16, 2014

Why shall we care about disequilibrium ?

Talks based on Mandel, A., Landini, S., Gallegati, M.,Gintis, H. (2013) “Price dynamics, financial fragility andaggregate volatility".In the financial system, bankruptcy is the mother of allrisks.

“A theory of monetary policy which pays no attention tobankruptcy and default is like Hamlet without the prince ofDenmark and is likely to lead to drastically erroneous policies."Greenwald and Stiglitz (2003), “Towards a new paradigm inMonetary Economics."

And bankruptcies are caused by mismatched betweendecentralized individual choices: i.e by disequilibrium

Why shall we care about disequilibrium ?

Why do we need Agent-Based Modeling ?

If we want to take disequilibrium seriously,

DISEQUILIBRIUMEquilib

rium

The ground to cover is huge.

Why do we need Agent-Based Modeling ?

Equilibrium: which sets of individual choices arecompatible ?Disequilibrium: how does each agent react in eachpossible state of its economic environment ? Whichdynamics emerge from interactions?From basic static mechanics to the n-body problem.

2kg X ?

10cm 30cm

Simulation is the only way forward.ABM as a simulation methodology tailored for economics.

From equilibrium

Acemoglu and al. (2012) "The Network Origins ofAggregate Fluctuations"

N sectors, M Households, Inelastic labor supply.Cobb-Douglas production Fg(lg , xg) = γg lαg

∏Nj=h x (1−α)Wg,h

g,h

Equilibrium GDP: αN [I − (1 − α)W ′]−11 · log(γ)

To Disequilibrium

Agents anchored to a spatio-temporal framework: theyindividually control the evolution of their production,consumption, balance sheet...Trade organized around a decentralized network.Production is financially constrained (impact of creditworthiness).Prices are set according to adaptive evolutionary rules.Dynamics induced by sequence of production, trade,consumption, accounting, price and network updating.Analysis based on large number of Monte-Carlosimulations.

Equilibrium regime

0 100 200 300 400 500 600 700 800 900 10000

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Mean sell price 1Mean sell price 2Mean sell price 3

0 100 200 300 400 500 600 700 800 900 10000

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output 1output 2output 3

Relaxation to equilibrium after a productivity shock (at T=500,productivity in sector 1 increases by 50%).

Disequilibrium regime

0 200 400 600 800 1000 1200 1400 1600 1800 20000

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Aggregate SupplyConsumptionAggregate Demand

(a) quantites0 200 400 600 800 1000 1200 1400 1600 1800 2000

0

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Mean sell price 1Mean sell price 2Mean sell price 3

(b) prices

0 200 400 600 800 1000 1200 1400 1600 1800 20000

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nb bankrupt firms

(c) Bankruptcies0 200 400 600 800 1000 1200 1400 1600 1800 2000

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1

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Weakth firm Coeff Variation

(d) Wealth dispersion

Interpretation

Network-based financial accelerator “The bankruptcy of aborrower creates a negative externality because the bad debt recordedon the lender’s balance sheet yields an increase of the interest ratecharged to all the other borrowers. This is the starting point of thefinancial accelerator. If the surviving borrowers experience an increaseof leverage due to the interest rate hike, the lender will react by raisingthe interest rate even further. Financial fragility will spread to theneighborhood and may spill over to the entire economy. An avalancheof bankruptcies may ensue. This is, in a nutshell, the way in which thenetwork-based financial accelerator amplifies a shock.” D.Delli Gatti, M.Gallegati and al. (2010)The financial accelerator in an evolving creditnetwork.

Strong positive feedbacks between disequilibrium andfinancial fragility.

ABM and Policy

Credit monitoring has a very large social value.In the model, intrinsic instability because of over-simplisticmonitoring.In practice, very low incentives to monitor creditors.Once incentives are set right, ABMs can help:

Diagnose disequilibria and propose remedies.Identify nexus of instabilities in the credit network.Help design more resilient networkTrack the circulation of credit and assess its real impact....

In practice

A number of ongoing projects, funded in particular by theEuropean Union under the umbrella of Global SystemScience (GSS). Please participate in the ongoing GSSconsultation !Eventually, efficiency of ABM will depend on the type ofdata that can be made available.

THANK YOU FOR YOUR ATTENTION