Reconstructing Macroeconomics: A Perspective from Statistical Physics and Combinatorial Stochastic Processes

by Masanao Aoki, Hiroshi Yoshikawa

Overview

The authors treat macroeconomic models as composed of large numbers of micro-units or agents of several types and explicitly discuss stochastic dynamic and combinatorial aspects of interactions among them. In mainstream macroeconomics sound microfoundations for macroeconomics have meant incorporating sophisticated intertemporal optimization by representative agents into models. Optimal growth theory, once meant to be normative, is now taught as a descriptive theory in mainstream macroeconomic courses. In neoclassical equilibria flexible prices led the economy to the state of full employment and marginal productivities are all equated. Professors Aoki and Yoshikawa contrariwise show that such equilibria are not possible in economies with a large number of agents of heterogeneous types. They employ a set of statistical dynamical tools via continuous-time Markov chains and statistical distributions of fractions of agents by types available in the new literature of combinatorial stochastic processes, to reconstruct macroeconomic models.

Product Details

ISBN-13:	9780521831062
Publisher:	Cambridge University Press
Publication date:	11/06/2006
Series:	Japan-US Center UFJ Bank Monographs on International Financial Markets
Edition description:	First Edition
Pages:	354
Product dimensions:	6.42(w) x 9.45(h) x 0.91(d)

About the Author

Masanao Aoki is Professor Emeritus in the Department of Economics at the University of California, Los Angeles.

Hiroshi Yoshikawa is Professor of Economics at the University of Tokyo.

Table of Contents

Preface 1 Masanao Aoki; Preface 2 Hiroshi Yoshikawa; 1. Introduction - a new approach to macroeconomics; 2. The methods - jump Markov processes and random partitions; 3. Equilibrium as distribution - the role of demand in macroeconomics; 4. Uncertainty trap - policy ineffectiveness and long stagnation of the macroeconomy; 5. Slow dynamics of the macro system - no mystery of inflexible prices; 6. Business cycles - an endogenous stochastic approach; 7. Labor market dynamics - a new look at natural unemployment and Okun's law; 8. Demand saturation - creation and economic growth; 9. The types of investors and volatility in financial markets - analyzing clusters of heterogeneous agents; 10. Stock prices and the real macroeconomy - power-law versus exponential distributions.

Editorial Reviews

"Thoughtful macroeconomists are uncomfortably aware that consumers, firms, and workers vary widely in their local environments, perceptions, and beliefs. Ignoring this heterogeneity, as 'modern macro' does, is a likely source of systematic error. Aoki and Yoshikawa propose to repair this failure by modelling the macroeconomy explicitly as a cloud of interacting particles. The goal is to deduce the distributions of economic characteristics that describe the system as a whole. This puts more emphasis on statistical properties, and less on the internal decision-making of each agent. There are already some surprising beginning results including a novel treatment of aggregate demand, and one can expect more when their approach is combined with standard economic reasoning. This is the start, not the finish, of a potentially far-reaching research program. It should excite the curiosity of all those thoughtful macroeconomists." -Robert Solow, Nobel Laureate, Massachusetts Institute of Technology

"Reconstructing Macroeconomics is an ambitious, informative, challenging…book that addresses fundamental questions of economic theory on many levels. In my view mainstream macroeconomists can only benefit by becoming familiar with the point of view Aoki and Yoshikawa represent so ably here…. Those who aspire to create a new macroeconomics, including the various schools of 'heterodox' economics, can also learn a lot from this book." - Journal of Economic Behavior and Organization

From the Publisher