Development of a Macroeconomic Model That Can Explicitly Illustrate the Impact of Multiple Kinds of Economic Rigidities in a Common Framework
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14.33 Research Plan
Traditional macroeconomic models have generally focused on how specific sources of market imperfections can be used to explain various macroeconomic phenomena. While many of them are able to effectively illustrate potential avenues of macroeconomic fluctuation, they are often not easily extendable to accommodate other sources of variation as well. This inflexibility means that choosing a model requires implicitly making specific discreet structural assumptions about the economy we hope to model.
This paper seeks to develop a macroeconomic model that can explicitly illustrate the impact of multiple kinds of economic rigidities in a common framework. By doing so it hopes to avoid having to make specific structural assumptions about the economy; instead allowing for a continuous calibration of the model to a wide range of circumstances.
I will begin by giving a preliminary description of the model I hope to develop. Following which I will briefly describe the methods I will use in development and empirical testing. Finally, I will give a description of the data I will use and the kind of results I hope to achieve with it.
Description of Model
The key difference in this model is that, rather than implicitly modeling market behavior by changing constraints on optimizing agents, we explicitly model the market as an agent itself and specify its behavior interface with regard to the rest of the agents.
In its basic form, the model consists of a continuum of workers with no initial wealth who can produce output 0 < y < ymax, and another agent who represents the market with initial capital C. The model is dynamic in discreet time and has two distinct stages within each time period...
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...mpts to describe fluctuations and not growth, the data will have to be detrended before use.
The other data we need would comprise on information on changes in a country’s market imperfections. This would consist of events such as the gas price controls or sudden changes in expectations brought about by burst bubbles. This would allow an empirical versus model response comparison.
There are three main objectives this paper hopes to achieve:
Firstly, it seeks to develop of a model that can successfully emulate the qualitative Implications of different traditional macroeconomic models.
Secondly, it hopes find combinations of different imperfections that allow the emulation of real world macroeconomic data.
Finally, it seeks to successfully test the viability of the model in predicting the implications of changing market imperfections.