Agent-based Models for Economic Policy Design

Abstract

Agent-based simulation models are used by an increasing number of scholars as a tool for providing evaluations of economic policy measures and policy recommendations in complex environments. Based on recent work in this area we discuss the advantages of agent-based modelling for economic policy design and identify further needs to be addressed for strengthening this methodological approach as a basis for sound policy advice.Economic policy advice requires a thorough understanding of the relevant economic mechanisms that are responsible for the (overall) effects of policy measures in the economy. Policy advice based on models where aspects, that crucially affect real world effects of the considered policy measures, are missing might be flawed and result in misleading recommendations. Theoretical work based on certain model structures accompanied by empirical evidence aims at giving us guidance on the causal relationship of key economic variables. Methods for the analysis of such relationship within established classes of (typically equilibrium) models, by means of analytical, numerical or econometric approaches are well developed and continuously improving. However, a key challenge, when providing policy advice, is that we have to select among the various explanations for certain economic phenomena. It is hardly the case -maybe never -that only a single school of thought or an exclusive methodological approach is able to explain a set of observable economic relationships. There are different explanations for business cycle fluctuations, the distribution of income or the role of human capital investments for economic growth just to name a few topics that policymakers care about. However, the choice of the modeling approach (which aspects are in, which are out) and the tools of analysis might crucially influence the predictions of effects of policy measures and even the set of questions about policy effects that can be sensibly addressed in the framework of the model. Obviously, the assertion which aspects of the economic environment have to be captured in order to provide meaningful policy advice on a certain issue is highly subjective -a prime example of differing subjective viewpoints in this respect is the controversial debate about the appropriate modeling strategy in macroeconomics and financial economics in the aftermath of the 2008/09 economic crisis (see Colander et al. 2009, or Schneider andKirchgässner 2009) -and we will not attempt to resolve the issue of how to select among different modeling approaches. Rather we would like to make a few points how a fairly new protagonist in the area of model-based economic policy advice -agent-based modelscan enrich the possibilities of a modeler to capture economic phenomena that seem relevant to policy makers and extend the set of questions that can be asked about policy effects. Also, we briefly point to 1 Department of Business Administration and Economics and Institute of Mathematical Economics, Bielefeld University, Germany.2 School of Economics and ...

Unemployment Benefits and Financial Leverage in an Agent Based Macroeconomic Model

“…Various authors proposed an agent based approach to the study of complex (macro)economic dynamics; just to make a few examples: Ashraf (Russo et al, 2007), the combination of Keynesian management of aggregate demand and Schumpeterian policies aimed at promoting technological progress (Dosi et al, 2010), the interplay between income distribution and economic policies , monetary and fiscal policies (Haber, 2008), the effectiveness of various stabilization policies (Westerhoff and Franke, 2012), labor market policies (Neugart, 2008), the role of regulatory policies on financial markets (Westerhoff, 2008), the effects of introducing a Tobin-like tax (Westerhoff and Dieci, 2006;Mannaro et al 2008;), and so on. Hence, agent based models represent an alternative formulation of microfoundations suited for a complex macroeconomic system and this different approach may have important implications for policy advice (Dawid and Neugart, 2011). For a comprehensive review, see Roventini (2009, 2012).…”

The Eurace@Unibi Model: An Agent-Based Macroeconomic Model for Economic Policy Analysis

“…The potential merits and the challenges of the use of an agentbased approach for economic analysis in general and the examination of economic policy issues in particular have been discussed for example in LeBaron and Tesfatsion (2008), Farmer and Foley (2009), Dawid and Neugart (2011) or Fagiolo and Roventini (2011). Closed macroeconomic models that follow an agent-based approach and are in spirit related to the Eurace@Unibi model have been developed among others by Delli , Dosi et al (2010) or Mandel et al (2010).…”

Stabilization Policies and Long Term Growth: Policy Implications from an Agent-Based Macroeconomic Model

“…The emerging out-of-equilibrium dynamics enable a policy analysis on different time scales, where policy effects can typically be distinguished in short-and long-term effects (see Dawid and Neugart, 2011). Considering different time scales is especially useful in the context of short-and long-term effects of stabilization policies.…”