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Top-Down versus Bottom-Up Macroeconomics

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  • Paul De Grauwe
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    Abstract

    I distinguish two types of macroeconomic models. The first type are top-down models in which some or all agents are capable of understanding the whole picture and use this superior information to determine their optimal plans. The second type are bottom-up models in which all agents experience cognitive limitations. As a result, these agents are only capable of understanding and using small bits of information. These are models in which agents use simple rules of behavior. These models are not devoid of rationality. Agents in these models behave rationally in that they are willing to learn from their mistakes. These two types of models produce a radically different macroeconomic dynamics. These differences are analyzed in this article. (JEL codes: E10, E32, D83) Copyright The Author 2010. Published by Oxford University Press on behalf of Ifo Institute for Economic Research, Munich. All rights reserved. For permissions, please email: journals.permissions@oxfordjournals.org, Oxford University Press.

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    Bibliographic Info

    Article provided by CESifo in its journal CESifo Economic Studies.

    Volume (Year): 56 (2010)
    Issue (Month): 4 (December)
    Pages: 465-497

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    Handle: RePEc:oup:cesifo:v:56:y:2010:i:4:p:465-497

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    Cited by:
    1. Steinar Holden, 2012. "Implications of insights from behavioral economics for macroeconomic models," IMK Working Paper 99-2012, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    2. Senbeta, Sisay, 2011. "How applicable are the new keynesian DSGE models to a typical low-income economy?," MPRA Paper 30931, University Library of Munich, Germany.
    3. Bofinger, Peter & Debes, Sebastian & Gareis, Johannes & Mayer, Eric, 2013. "Monetary policy transmission in a model with animal spirits and house price booms and busts," Journal of Economic Dynamics and Control, Elsevier, vol. 37(12), pages 2862-2881.
    4. Liu, Chunping & Minford, Patrick, 2012. "Comparing behavioural and rational expectations for the US post-war economy," CEPR Discussion Papers 9132, C.E.P.R. Discussion Papers.
    5. Kallåk Anundsen , André & Sigurd Holmsen Krogh, Tord & Nymoen, Ragnar & Vislie, Jon, 2011. "Overdeterminacy and endogenous cycles: Trygve Haavelmo’s business cycle model and its implications for monetary policy," Memorandum 03/2011, Oslo University, Department of Economics.
    6. Lena Dräger, 2011. "Endogenous Persistence with Recursive Inattentiveness," Macroeconomics and Finance Series 201103, Hamburg University, Department Wirtschaft und Politik.
    7. Lengnick, Matthias, 2013. "Agent-based macroeconomics: A baseline model," Journal of Economic Behavior & Organization, Elsevier, vol. 86(C), pages 102-120.
    8. Dieppe, Alistair & Pandiella, Alberto González & Hall, Stephen & Willman, Alpo, 2013. "Limited information minimal state variable learning in a medium-scale multi-country model," Economic Modelling, Elsevier, vol. 33(C), pages 808-825.
    9. Wagner, Richard E., 2012. "A macro economy as an ecology of plans," Journal of Economic Behavior & Organization, Elsevier, vol. 82(2), pages 433-444.
    10. Carl Chiarella & Corrado Di Guilmi, 2011. "Limit Distribution of Evolving Strategies in Financial Markets," Research Paper Series 294, Quantitative Finance Research Centre, University of Technology, Sydney.
    11. Jochen Michaelis, 2013. "Und dann werfen wir den Computer an – Anmerkungen zur Methodik der DSGE-Modelle," MAGKS Papers on Economics 201323, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    12. John C. Driscoll & Steinar Holden, 2014. "Behavioral Economics and Macroeconomic Models," CESifo Working Paper Series 4785, CESifo Group Munich.
    13. Hatcher, Michael C. & Minford, Patrick, 2013. "Stabilization policy, rational expectations and price-level versus inflation targeting: a survey," Cardiff Economics Working Papers E2013/14, Cardiff University, Cardiff Business School, Economics Section.

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