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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. I analyze these differences.

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    Bibliographic Info

    Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3020.

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    Date of creation: 2010
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    Handle: RePEc:ces:ceswps:_3020

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    Keywords: DSGE-model; imperfect information; heuristics; animal spirits;

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    Cited by:
    1. Lena Dräger, 2011. "Endogenous Persistence with Recursive Inattentiveness," KOF Working papers 11-285, KOF Swiss Economic Institute, ETH Zurich.
    2. SENBATA, Sisay Regassa, 2011. "How applicable are the new Keynesian DSGE models to a typical low-income economy?," Working Papers 2011016, University of Antwerp, Faculty of Applied Economics.
    3. 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.
    4. 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.
    5. 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.
    6. Driscoll, John C. & Holden, Steinar, 2014. "Behavioral Economics and Macroeconomic Models," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2014-43, Board of Governors of the Federal Reserve System (U.S.).
    7. Wagner, Richard E., 2012. "A macro economy as an ecology of plans," Journal of Economic Behavior & Organization, Elsevier, vol. 82(2), pages 433-444.
    8. Carl Chiarella & Corrado Di Guilmi, 2011. "Limit Distribution of Evolving Strategies in Financial Markets," Research Paper Series, Quantitative Finance Research Centre, University of Technology, Sydney 294, Quantitative Finance Research Centre, University of Technology, Sydney.
    9. Jochen Michaelis, 2013. "Und dann werfen wir den Computer an – Anmerkungen zur Methodik der DSGE-Modelle," MAGKS Papers on Economics, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung) 201323, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    10. Liu, Chunping & Minford, Patrick, 2012. "Comparing behavioural and rational expectations for the US post-war economy," Cardiff Economics Working Papers E2012/21, Cardiff University, Cardiff Business School, Economics Section.
    11. Lengnick, Matthias, 2011. "Agent-based macroeconomics - a baseline model," Economics Working Papers 2011,04, Christian-Albrechts-University of Kiel, Department of Economics.
    12. 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.
    13. Bofinger, Peter & Debes, Sebastian & Gareis, Johannes & Mayer, Eric, 2012. "Monetary Policy Transmission in a Model with Animal Spirits and House Price Booms and Busts," CEPR Discussion Papers 8804, C.E.P.R. Discussion Papers.

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