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Macroeconomies as Constructively Rational Games

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  • Sinitskaya, Ekaterina
  • Tesfatsion, Leigh

Abstract

Real-world decision-makers are forced to be locally constructive, in the sense that their actions are constrained by the interaction networks, limited information, and computational capabilities at their disposal. This study poses the following question: Suppose utility-seeking consumers and profit-seeking firms in an otherwise standard dynamic macroeconomic model are required to be locally constructive decision-makers, unaided by the external imposition of global coordination conditions. What combinations of locally constructive decision rules result in good macroeconomic performance relative to a social planner benchmark model, and what are the game-theoretic properties of these decision-rule combinations? We begin our investigation of this question by specifying locally constructive decision rules for the consumers and firms that range from simple reinforcement learning to sophisticated adaptive dynamic programming algorithms. We then use computational experiments to explore macroeconomic performance under alternative decision-rule combinations. A key finding is that simpler rules can outperform more sophisticated rules, but that forward-looking behavior coupled with a relatively long memory permitting past observations to inform current decision-making is critical for good performance.

Suggested Citation

  • Sinitskaya, Ekaterina & Tesfatsion, Leigh, 2014. "Macroeconomies as Constructively Rational Games," Staff General Research Papers Archive 37834, Iowa State University, Department of Economics.
  • Handle: RePEc:isu:genres:37834
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    More about this item

    Keywords

    Learning; Macroeconomics; agent-based; game; stochastic optimization;
    All these keywords.

    JEL classification:

    • B4 - Schools of Economic Thought and Methodology - - Economic Methodology
    • C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling
    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment

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