Behavioral and Experimental Macroeconomics and Policy Analysis: A Complex Systems Approach

Cars Hommes

Journal of Economic Literature, 2021, vol. 59, issue 1, 149-219

Abstract: This survey discusses behavioral and experimental macroeconomics, emphasizing a complex systems perspective. The economy consists of boundedly rational heterogeneous agents who do not fully understand their complex environment and use simple decision heuristics. Central to our survey is the question of under which conditions a complex macro-system of interacting agents may or may not coordinate on the rational equilibrium outcome. A general finding is that under positive expectations feedback (strategic complementarity)—where optimistic (pessimistic) expectations can cause a boom (bust)—coordination failures are quite common. The economy is then rather unstable, and persistent aggregate fluctuations arise strongly amplified by coordination on trend-following behavior leading to (almost-)self-fulfilling equilibria. Heterogeneous expectations and heuristics switching models match this observed micro and macro behavior surprisingly well. We also discuss policy implications of this coordination failure on the perfectly rational aggregate outcome and how policy can help to manage the self-organization process of a complex economic system.

JEL-codes: C63 C90 D91 E12 E71 G12 (search for similar items in EconPapers)
Date: 2021
References: Add references at CitEc
Citations: View citations in EconPapers (88)

Downloads: (external link)
https://www.aeaweb.org/doi/10.1257/jel.20191434 (application/pdf)
https://www.aeaweb.org/doi/10.1257/jel.20191434.ds (application/zip)
Access to full text is restricted to AEA members and institutional subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:aea:jeclit:v:59:y:2021:i:1:p:149-219

Ordering information: This journal article can be ordered from
https://www.aeaweb.org/journals/subscriptions

DOI: 10.1257/jel.20191434

Access Statistics for this article

Journal of Economic Literature is currently edited by Steven Durlauf

More articles in Journal of Economic Literature from American Economic Association Contact information at EDIRC.
Bibliographic data for series maintained by Michael P. Albert ().