Monetary and fiscal policy in an agent-based macromodel

Econophysics is a provocative area of agent-based research that has recently been applied to macroeconomic modeling. Some researchers propose that econophysics provides useful "implicit microfoundations" for macroeconomics. The social-architecture model is an econophysics-influenced agent-based macromodel of a monetary economy. Simulations of the social-architecture model have been found to generate macroeconomic outcomes mimicking key empirical indicators, including unemployment and production fluctuations. This paper further characterizes business cycle dynamics in the social-architecture model.

In the computational tradition of zero-intelligence agents, the social-architecture model generates macroeconomic outcomes as the emergent properties of an economy that contains many weakly coordinated heterogeneous agents. The behavior of these agents is rule-based rather than strongly rational. Additionally, behavior is continually subject to stochastic shocks. However, agents are constrained by the institutional structures within which they interact, and labor market institutions play a particularly salient role in propagating business cycles. As in Becker (1962) and Gode and Sunder (1993), the methodological emphasis on institutions and constraints minimizes the dependence of model outcomes on the peculiarities of specific economic theories. Mild distributional assumptions on behavior subject to uncontroversial constraints (such as budget constraints) replace strong rationality assumptions and equilibrium trading constraints.

This paper explores the effectiveness and interactions of monetary and fiscal policy in a variant of the social-architecture model. Monetary and fiscal policy produce substantial effects on hiring dynamics, and this can alter the distributions of household employment status and earnings. Since agent-based methods are particularly suitable for tracking individual-level outcomes, we are able to explore the individual-level consequences of policy changes. For example, some agents are employers, some are employed, and some are unemployed. We track how the employment status of each agent changes over time in response to both the local (microeconomic) and global (macroeconomic) state of the economy, including the current monetary and fiscal policy stance. This allows us to explore how the distribution of employment status varies with policy. In this sense, we examine the effects of policy changes on the structure of employment.