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

Muhammad Ashfaq Ahmed and Nasreen Nawaz

MPRA Paper from University Library of Munich, Germany

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.

Keywords: Macroeconomic Modeling; Heterogeneous Agents; Bounded Rationality; Equilibrium; Disequilibrium; Coordination (search for similar items in EconPapers)
JEL-codes: E21 E22 E23 E27 E30 E31 E32 E37 E43 E44 J22 J23 J31 J38 (search for similar items in EconPapers)
Date: 2023-09-24, Revised 2024-01-01
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