How Shocks Affect Markets: A Novel Dynamical Macroeconomic Model to Explain Adjustment of Markets and Equilibria

Ahmed, Muhammad Ashfaq and Nawaz, Nasreen (2023): How Shocks Affect Markets: A Novel Dynamical Macroeconomic Model to Explain Adjustment of Markets and Equilibria. Published in: Modern Economy and Management (20 June 2024)

Abstract

Most of macroeconomic models are based on representative agents with identical preferences for all consumers and production technology for all producers, i.e., an assumption too simplistic if not unrealistic to model the real world. Similarly, the models revolve around a general equilibrium for all markets which seldom exists in a dynamic and rapidly changing and evolving world where shocks keep happening too frequently to imagine all markets to stay put in an economy. There is a lack of robustness of macroeconomic models with respect to inflexible assumptions they are based on (including but not limited to specific structural forms for utility functions and production technology). This paper provides a foundation stone for a more realistic macroeconomic modeling based on practical behavior of economic agents with minimum number of assumptions without use of specific and complex structural forms as compared to those in the existing literature. It provides results which are robust to heterogeneous consumers and producers exhibiting bounded rationality; and equilibrium expressions as well as disequilibrium paths after shocks happen to various markets. It models macroeconomy based on easily measurable empirical components.

• Item Type: MPRA Paper
• Language: English
• Keywords: Macroeconomic Modeling, Heterogeneous Agents, Bounded Rationality, Equilibrium, Disequilibrium, Coordination
• Subjects: E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E21 - Consumption ; Saving ; Wealth; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E22 - Investment ; Capital ; Intangible Capital ; Capacity; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E23 - Production; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E27 - Forecasting and Simulation: Models and Applications; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E30 - General; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E37 - Forecasting and Simulation: Models and Applications; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E43 - Interest Rates: Determination, Term Structure, and Effects; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy; J - Labor and Demographic Economics > J2 - Demand and Supply of Labor > J22 - Time Allocation and Labor Supply; J - Labor and Demographic Economics > J2 - Demand and Supply of Labor > J23 - Labor Demand; J - Labor and Demographic Economics > J3 - Wages, Compensation, and Labor Costs > J31 - Wage Level and Structure ; Wage Differentials; J - Labor and Demographic Economics > J3 - Wages, Compensation, and Labor Costs > J38 - Public Policy

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