Several independent datasets concerning household behavior in the Washington, D.C. metropolitan area are combined to create an agent-based model of the recent housing market bubble and its aftermath. Comprehensive data on housing stock attributes, primarily from local government sources, are used as input to the model, as are administratively-complete data on household characteristics. Data covering all real estate transactions over the period 1997-2009 are used as targets for model output, including inventory levels and average days-on-market in addition to price statistics. Finally, a very large sample of mortgage service data (80-90 percent coverage of metro D.C.) serve as both input to the model (e.g., mortgage types, interest rates obtained) as well as target output (e.g., refinancing rates, foreclosure levels). The model consists of a large number of heterogeneous households who make rent or buy decisions, are matched to homes and commonly seek mortgages with which to purchase homes. These households have homogeneous rules of behavior but heterogeneous realized behavior since decisions depend on local household characteristics (e.g., size, composition, financials). This is a so-called agent-based computational model since each household and the banks originating mortgages are software agents while each home and each mortgage are soft- ware objects. The model is capable of running at full-scale with the metropolitan D.C. housing market, over 2 million households. Overall, we find that certain empirically- grounded household decision rules are capable of generating a home price bubble much like what was observed during this time period. The model does not get the absolute bubble level and the timing of its bursting exactly right but does a good job on certain market ’internals’ such as real estate sales, inventories and market tightness. Not in the model at present are fine-grained aspect of household decision-making (e.g., moving in advance of schools starting) and thus the model lacks certain well-known temporal phenomena like seasonality. Also, while the home purchase market is deeply represented in the model, few details of the rental market are present, a further weakness. These limitations and parameter sensitivities are described. Despite these flaws, we use the calibrated model to perform a few policy experiments. Our preliminary findings are that tighter interest rate policies would have done little to attenuate the price bubble, while limiting household leverage would have had a larger effect.

This paper elaborates on four different reasons why the assumption of continual dynamic stochastic general equilibrium, which is now standard in mainstream macroeconomics but is not used in agent based macro, makes a macro model less useful: (1) it assumes away most coordination problems, (2) it hides possible instabilities, (3) it makes money look unimportant, and (4) it makes inflation look trivial.

In this article we introduce the Schumpeterian growth paradigm, where growth results from innovations that render previous innovations obsolete. We show how this paradigm can be used to elucidate enigmas in recent growth history, such as the growth take-off, secular stagnation, and the middle-income trap. We then illustrate how the Schumpeterian paradigm can be tested using rich micro data, focusing on the relationship between product market competition and innovation-led growth. Finally, we use the paradigm to question some common wisdoms on growth policymaking.

The sharp increase in wage inequality that has taken place since the early 1980s in developed countries, especially in the US and the UK, has sprung intense debates among economists. The rapidly growing literature on the subject reßects substantial progress in narrowing down the search for robust explanations, in particular by emphasizing the primary role of (skillbiased) technological progress; yet this literature leaves some important puzzles still open to further inquiry. The Þrst puzzle concerns the evolution of wage inequality between educational groups; although the relative supply of college-educated workers increased noticeably within the past 30 years, the wage ratio between college graduates and high-school graduates rose substantially in countries like the US and the UK between the early 1980s and the mid1990s. In the US, for example, Autor et al. (1998) show that the ratio of “college-equivalents” (deÞned as the number of workers with a college degree plus half the number of workers with some college education) to “non-college equivalents” workers (deÞned as the complementary set of workers) increased at an average rate of 3.05% between 1970 and 1995, up from an average rate of 2.35% between 1940 and 1970. In parallel to these movements in relative supply, the ratio between the average weekly wages of collegeand high-school graduates went up by more than 25 percent during the period 1970-1995, although it had fallen by 0.11% a year on average during the previous period. The second puzzle is that wage inequality has also increased sharply within educational and age groups: in particular Machin (1996a) Þnds that the residual standard deviation in hourly earnings increased by 23% in the UK and by 14% in the US over the period between 1979 and 1993; equally intriguing is the fact that the rise in within-group wage inequality

Cet article examine les effets macroéconomiques résultant de l’introduction de ce que Bresnahan et Trajtenberg appellent une « technologie multi-usages » (TMU) comme, par exemple, la technologie informatique. L’analyse est basée sur le principe qu’une nouvelle TMU accélère le rythme de changement technologique en créant une vague d’innovations secondaires destinées à améliorer et à atteindre le potentiel de la TMU d’origine. Cet article étudie les voies à travers lesquelles une hausse du rythme de changement technologique pourrait réduire le niveau d’activité économique mesuré avant de conduire l’économie à un niveau de croissance supérieur. Deux voies sont l’obsolescence du capital et l’absence de mesure de l’investissement de la connaissance dans les comptes nationaux. Un modèle de croissance endogène simple qui a été construit et adapté à l’économie américaine prévoit que l’obsolescence du capital est la plus significative des deux voies, et que, dans ce cas, la production sera pendant près de trois décennies inférieure à ce qu’elle aurait été sans l’introduction de la nouvelle TMU.

For at least 5000 years, people have created, modified and used financial instruments, markets and intermediaries. Whether it was the use of money and debt to facilitate specialization and investment in Babylonia in 3000 BC (Van de Mieroop, 2005), the creation of market-traded securities in ancient Rome to mobilize capital for immense minig projets (Rostovotzeff, 1957; Malmendier, 2005).

This paper argues that macro models should be as simple as possible, but not more so. Existing models are “more so” by far. It is time for the science of macro to step beyond representative agent, DSGE models and focus more on alternative heterogeneous agent macro models that take agent interaction, complexity, coordination problems and endogenous learning seriously. It further argues that as analytic work on these scientific models continues, policy-relevant models should be more empirically based; policy researchers should not approach the data with theoretical blinders on; instead, they should follow an engineering approach to policy analysis and let the data guide their choice of the relevant theory to apply.

Chapter 10 recapitulates aspects of the overarching theme of this book such as state and citizenship, civic political culture and value change, the role of political structures, basic tools for national development planning, and the evolving nexus between emerging demographic and population trends and urbanization. Utilizing historical and contemporary data on national population growth and forecasts, the chapter illuminates the more enduring challenges Nigeria would have to deal with as it engages its national development planning for the years ahead. It also elucidates the problem of a growing but unemployed youth population, the role of government in macroeconomic adjustments, and the lack of effective residential ‘rent control’ mechanism – as the major cause of urban decay and degeneration that is witnessed in many of the major cities. The chapter ends by providing a critical assessment of the …

I construct and analyse a simple general equilibrium model with an active credit market in which borrowers and lenders form expectations adaptively. Except for expectation formation the model is a small open economy variant of the standard Lucas (1978) tree model. To abstract from institutional detail there is just a representative investor/borrower and a representative lender (rest of the world), both of whom are learning from experience. The point is to show that even in this fairly standard model financial crises can occur, and to examine the conditions, with respect to policy, institutions and other aspects of the environment, that affect the likelihood of crises in the model.

In this paper we introduce capital accumulation in the Schumpeterian growth framework. A first main result is that capital accumulation and innovation are both essential inputs to long-run growth. More innovation stimulates capital accumulation by raising the marginal product of capital. More capital accumulation stimulates innovation by raising the profits accruing to a successful innovator. This result runs counter to the conventional belief to the effect that innovation alone determines the long-run growth rate while capital accumulation determines only the level of the long-run growth path. In the second part of the paper we discuss the implication of merging capital accumulation and innovation-led growth for growth accounting.

This paper is an exploratory analysis of the role that banks play in supporting what Jevons called the “mechanism of exchange.” It considers a model economy in which exchange activities are facilitated and coordinated by a self-organizing network of entrepreneurial trading firms. Collectively, these firms play the part of the Walrasian auctioneer, matching buyers with sellers and helping the economy to reach prices at which peoples’ trading plans are mutually compatible. Banks affect macroeconomic performance in this economy because their lending activities facilitate the entry and influence the exit decisions of trading firms. Both entry and exit have ambiguous effects on performance, and we resort to computational analysis to understand how they are resolved. Our analysis draws an important distinction between normal and worst-case scenarios, with the economy experiencing systemic breakdowns in the latter. We show that banks can provide a “financial stabilizer” that more than counteracts the familiar financial accelerator, and that the stabilizing role of the banking system is particularly apparent in worst-case scenarios. In line with this result, we also find that under less restrictive lending standards banks are able to more effectively improve macroeconomic performance in the worst-case scenarios.

We use an agent-based computational approach to show how inflation can worsen macroeconomic performance by disrupting the mechanism of exchange in a decentralized market economy. We find that, in our model economy, increasing the trend rate of inflation above 3% has a substantial deleterious effect, but lowering it below 3% has no significant macroeconomic consequences. Our finding remains qualitatively robust to changes in parameter values and to modifications to our model that partly address the Lucas critique. Finally, we contribute a novel explanation for why cross-country regressions may fail to detect a significant negative effect of trend inflation on output even when such an effect exists in reality.

Expectations matter. Many economic and financial decisions depend on the perception of future incomes and prices. The evolution of expectations, and how correct they are over time, determines the stability of the system.

This paper analyzes what assumptions on formation of expectations are consistent with Minsky’s Financial Instability Hypothesis (FIH) and its corollaries. The FIH establishes that financial relations evolve over time turning a stable system into an unstable one. Financial crises would be more likely to occur, and more severe if they occur, the longer the previous crisis recedes into the past. We show that the hypothesis is consistent with assumptions on formation of expectations that imply learning from realization of states and inconsistent with the assumption of full information rational expectations.

Can a country grow faster by saving more? The paper addresses this question both theoretically and empirically. In the theoretical model, growth results from innovations that allow local sectors to catch up with frontier technology. In poor countries, catching up requires the cooperation of a foreign investor who is familiar with the frontier technology and a domestic entrepreneur who is familiar with local conditions. In such a country, domestic savings matters for innovation, and therefore growth, because it enables the local entrepreneur to put equity into this cooperative venture, which mitigates an agency problem that would otherwise deter the foreign investor from participating. In rich countries, domestic entrepreneurs are already familiar with frontier technology and therefore do not need to attract foreign investment to innovate, so domestic savings does not matter for growth.A cross-country regression shows that lagged savings is positively associated with productivity growth in poor countries but not in rich countries.

In this paper, we provide empirical evidence to the effect that strong patent rights may complement competition-increasing product market reforms in fostering innovation. First, we find that the product market reform induced by the large-scale internal market reform of the European Union in 1992 enhanced, on average, innovative investments in manufacturing industries of countries with strong patent rights since the pre-sample period, but not so in industries of countries with weaker patent rights. Second, the positive response to the product market reform is more pronounced in industries where, in general, innovators tend to value patent protection higher than in other industries, except for the manufacture of electrical and optical equipment. The observed complementarity between competition and patent protection can be rationalized using a Schumpeterian growth model with step-by-step innovation. In such a model, better patent protection prolongs the period over which a firm that successfully escapes competition by innovating, actually enjoys higher monopoly rents from its technological upgrade.

In this review, we argue that the Schumpeterian growth paradigm, which models growth as resulting from innovations involving creative destruction, sheds light on several aspects of the growth process that cannot be properly addressed by alternative theories. We focus on three important aspects for which Schumpeterian growth theory delivers predictions that distinguish it from other growth models, namely, (a) the role of competition and market structure, (b) firm dynamics, and (c) the relationship between growth and development.

In this paper we propose and study a theory of adaptive consumption behavior under income uncertainty and liquidity constraints. We assume that consumption is governed by a linear function of wealth, whose coefficients are revised each period by a procedure that places few informational or computational demands on the consumer. We show that under a variety of settings the procedure converges quickly to a set of coefficients with low welfare cost relative to a fully optimal nonlinear consumption function.