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Harrodian instability in decentralized economies: an agent-based approach

Harrodian instability in decentralized economies: an agent-based approach Harrodian instability emerges in post-Keynesian models because of the cumulative feedback between demand and investments. This paper presents a novel approach to deal with Harrodian instability. The main contribution is methodological and lies in the different theoretical mechanism adopted to avoid unstable dynamics. While the common approach relies on aggregative investment functions, we emphasize the role of heterogeneity in expectations as a stabilization device. We introduce a small-scale agent-based version of the so-called neo-Kaleckian model. The model features a parsimonious microfoundation of investment decisions. Agents have heterogeneous expectations about demand growth and set their investment expenditures in a decentralized way. Interactions occur through demand externalities. We present results for different scenarios. First, when heterogeneity is ruled out, Harrodian instability is shown to emerge as for the aggregate model. Instead, when heterogeneity is accounted for, a stable dynamics with endogenous fluctuations arises. At the same time, in this second scenario, all the Keynesian implications are preserved, including the presence of macroeconomic paradoxes. Sensitivity analysis confirms the general robustness of our results and the logical consistency of the model. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png "Economia Politica" Springer Journals

Harrodian instability in decentralized economies: an agent-based approach

Russo, Emanuele
"Economia Politica" , Volume 38 (2) – Sep 30, 2020
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References (130)

Publisher
Springer Journals
Copyright
Copyright © Springer Nature Switzerland AG 2020
ISSN
1120-2890
eISSN
1973-820X
DOI
10.1007/s40888-020-00200-w
Publisher site
See Article on Publisher Site

Abstract

Harrodian instability emerges in post-Keynesian models because of the cumulative feedback between demand and investments. This paper presents a novel approach to deal with Harrodian instability. The main contribution is methodological and lies in the different theoretical mechanism adopted to avoid unstable dynamics. While the common approach relies on aggregative investment functions, we emphasize the role of heterogeneity in expectations as a stabilization device. We introduce a small-scale agent-based version of the so-called neo-Kaleckian model. The model features a parsimonious microfoundation of investment decisions. Agents have heterogeneous expectations about demand growth and set their investment expenditures in a decentralized way. Interactions occur through demand externalities. We present results for different scenarios. First, when heterogeneity is ruled out, Harrodian instability is shown to emerge as for the aggregate model. Instead, when heterogeneity is accounted for, a stable dynamics with endogenous fluctuations arises. At the same time, in this second scenario, all the Keynesian implications are preserved, including the presence of macroeconomic paradoxes. Sensitivity analysis confirms the general robustness of our results and the logical consistency of the model.

Journal

"Economia Politica" – Springer Journals

Published: Sep 30, 2020

Keywords: Harrodian instability; Agent-based models; Coordination failures; Heterogeneous expectations; E03; E12; E27

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