Network-based Macroeconomics: A Preliminary Investigation

Vipin Pudiyadath Veetil

Advisor: Richard E Wagner, PhD, Department of Economics

Committee Members: Carlos D. Ramirez, Robert Axtell

Carow Hall, Conference Room
June 28, 2016, 11:00 AM to 08:00 AM


A Reformulation of Schumpeter's Theory of Macroeconomic Turbulence

In 1939 Schumpeter sketched a somewhat promising theory to explain the instability of macroeconomic variables. Schumpeter’s theory however did not produce a research program, which means that many of the lacunas and limitations of his theory remain unresolved. In this paper, we develop some central themes of Schumpeter’s theory, discard certain vestigial elements, and address some unanswered questions within Schumpeter’s schema.

The Effects of Monetary Shocks on the Distribution of Prices

Empirical evidence shows monetary shocks have two temporary effects on the distribution of prices: the dispersion of prices increases and some prices change in the ‘wrong’ direction. We present a model that produces the observed relations between monetary shocks and the distribution of prices. In our model, firms are related to each other through an input-output network. New money enters the economy through some firms and percolates to other firms through demand and supply linkages.

Towards a New Austrian Macroeconomics

Austrian macroeconomists of the interwar period saw the economy as a complex adaptive system, in which macroeconomic variables emerge from the interaction between millions of purposefully acting agents. Recent advances in computation technology allow us to build empirically salient synthetic economies in silico, and thereby formalize many Austrian insights. We present a workhorse model with firms on an input-output network. Macroeconomic variables evolve through the interaction between micro-economic decisions. We use the model to explain an effect of monetary shocks on the price distribution and provide a sketch of other potential applications.

Alternative Micro-foundations for Macro Theory: Additive and Ecological

The DSGE framework treats the micro-macro relationship as additive, which supports a horizontal type of analysis wherein macro variables interact directly with one another. This framework yields a steady rate of growth when exogenous shocks are absent. It leads in turn to an examination of whether there are monetary rules that will calm the turbulence that results from nominal shocks. In contrast to the DSGE framework, this paper explores an ecological approach to the micro-macro relationship. This framework entails a vertical form of analysis where there is causal interaction between micro and macro variables. In place of systemic equilibrium, the ecological micro foundation reflects processes of spontaneous ordering where there is interdependence between macro-level variables and micro-level activities. This micro-macro interdependence leads in turn to different insight into and concerns about the ability of monetary rules to control nominal shocks.