1. Disequilibrium and Agent-Based Modelling
OECD-ECLAC New Tools Workshop
Antoine Mandel
University Paris 1 Panthéon-Sorbonne, Paris School of Economics
May 16, 2014
2. Why shall we care about disequilibrium ?
Talks based on Mandel, A., Landini, S., Gallegati, M.,
Gintis, H. (2013) “Price dynamics, financial fragility and
aggregate volatility".
In the financial system, bankruptcy is the mother of all
risks.
“A theory of monetary policy which pays no attention to
bankruptcy and default is like Hamlet without the prince of
Denmark and is likely to lead to drastically erroneous policies."
Greenwald and Stiglitz (2003), “Towards a new paradigm in
Monetary Economics."
And bankruptcies are caused by mismatched between
decentralized individual choices: i.e by disequilibrium
4. Why do we need Agent-Based Modeling ?
If we want to take disequilibrium seriously,
DISEQUILIBRIUM
Equilibrium
The ground to cover is huge.
5. Why do we need Agent-Based Modeling ?
Equilibrium: which sets of individual choices are
compatible ?
Disequilibrium: how does each agent react in each
possible state of its economic environment ? Which
dynamics 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.
6. From equilibrium
Acemoglu and al. (2012) "The Network Origins of
Aggregate Fluctuations"
N sectors, M Households, Inelastic labor supply.
Cobb-Douglas production Fg(lg, xg) = γglα
g
N
j=h x
(1−α)Wg,h
g,h
Equilibrium GDP: α
N [I − (1 − α)W ]−11 · log(γ)
7. To Disequilibrium
Agents anchored to a spatio-temporal framework: they
individually control the evolution of their production,
consumption, balance sheet...
Trade organized around a decentralized network.
Production is financially constrained (impact of credit
worthiness).
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-Carlo
simulations.
8. Equilibrium regime
0 100 200 300 400 500 600 700 800 900 1000
0
0.2
0.4
0.6
0.8
1
1.2
1.4
Mean sell price 1
Mean sell price 2
Mean sell price 3
0 100 200 300 400 500 600 700 800 900 1000
0
20
40
60
80
100
120
output 1
output 2
output 3
Relaxation to equilibrium after a productivity shock (at T=500,
productivity in sector 1 increases by 50%).
10. Interpretation
Network-based financial accelerator “The bankruptcy of a
borrower creates a negative externality because the bad debt recorded
on the lender’s balance sheet yields an increase of the interest rate
charged to all the other borrowers. This is the starting point of the
financial accelerator. If the surviving borrowers experience an increase
of leverage due to the interest rate hike, the lender will react by raising
the interest rate even further. Financial fragility will spread to the
neighborhood and may spill over to the entire economy. An avalanche
of bankruptcies may ensue. This is, in a nutshell, the way in which the
network-based financial accelerator amplifies a shock.” D.Delli Gatti, M.
Gallegati and al. (2010)The financial accelerator in an evolving credit
network.
Strong positive feedbacks between disequilibrium and
financial fragility.
11. ABM and Policy
Credit monitoring has a very large social value.
In the model, intrinsic instability because of over-simplistic
monitoring.
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 network
Track the circulation of credit and assess its real impact.
...
12. In practice
A number of ongoing projects, funded in particular by the
European Union under the umbrella of Global System
Science (GSS). Please participate in the ongoing GSS
consultation !
Eventually, efficiency of ABM will depend on the type of
data that can be made available.
