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Endogenous Heterogeneity, the Propagation of Information and Macroeconomic Complexity

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  • Orlando Gomes

Abstract

The economy is an adaptive and evolving complex system. The recognition of this fact has produced, over the last few years, a gradual but firm shift on the direction taken by mainstream economic thought. The representative agent paradigm is giving place to settings of interacting heterogeneous agents, capable of generating dynamic outcomes that are unique for each assumed pattern of interaction. The complexity era, as it is called, requires original insights and innovative approaches, in order to reinterpret the economic reality. This paper intends to contribute to the complexity literature in economics by exploring a popular macroeconomic model (the sticky-information model) from a new angle. Information acquisition by price-setting firms will be endogenously determined in two steps: (i) the competition between almost identical media leads to an irregular pattern of information creation; (ii) once created, information spreads throughout the interested audience following a diffusion process. The con sequence is an erratic aggregate pattern of information acquisition that has consequences at a macro level, namely concerning the shape of the Phillips curve, which will change every period. Heterogeneity, self-organization, evolution and out-of-equilibrium dynamics are features that allow to classify the suggested framework as a setting of macroeconomic complexity.

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Bibliographic Info

Article provided by Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies in its journal Czech Economic Review.

Volume (Year): 6 (2012)
Issue (Month): 1 (March)
Pages: 38-58

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Handle: RePEc:fau:aucocz:au2012_038

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Related research

Keywords: Complexity; information production and diffusion; heterogeneity; sticky-information; nonlinear dynamics;

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  1. N. Gregory Mankiw & Ricardo Reis, 2001. "Sticky Information Versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve," Harvard Institute of Economic Research Working Papers 1922, Harvard - Institute of Economic Research.
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  11. Fontana Magda, 2008. "The complexity approach to economics : a Paradigm shift," CESMEP Working Papers 200801, University of Turin.
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  15. Gomes, Orlando, 2006. "Too much of a good thing: endogenous business cycles generated by bounded technological progress," MPRA Paper 2845, University Library of Munich, Germany.
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