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Non-Self-Averaging in Macroeconomic Models: A Criticism of Modern Micro-founded Macroeconomics

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  • AOKI Masanao
  • YOSHIKAWA Hiroshi

Abstract

Using a simple stochastic growth model, this paper demonstrates that the coefficient of variation of aggregate output or GDP does not necessarily go to zero even if the number of sectors or economic agents goes to infinity. This phenomenon known as non-self-averaging implies that even if the number of economic agents is large, dispersion can remain significant, and, therefore, that we can not legitimately focus on the means of aggregate variables. It, in turn, means that the standard microeconomic foundations based on the representative agent has little value for they are expected to provide us with dynamics of the means of aggregate variables. The paper also shows that non-self-averaging emerges in some representative urn models. It suggests that non-self-averaging is not pathological but quite generic. Thus, contrary to the main stream view, micro-founded macroeconomics such as a dynamic general equilibrium model does not provide solid micro foundations.

Suggested Citation

  • AOKI Masanao & YOSHIKAWA Hiroshi, 2007. "Non-Self-Averaging in Macroeconomic Models: A Criticism of Modern Micro-founded Macroeconomics," Discussion papers 07057, Research Institute of Economy, Trade and Industry (RIETI).
  • Handle: RePEc:eti:dpaper:07057
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    References listed on IDEAS

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    1. Romer, Paul M, 1986. "Increasing Returns and Long-run Growth," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 1002-1037, October.
    2. Plosser, Charles I, 1989. "Understanding Real Business Cycles," Journal of Economic Perspectives, American Economic Association, vol. 3(3), pages 51-77, Summer.
    3. Aoki, Masanao, 2008. "Thermodynamic limits of macroeconomic or financial models: One- and two-parameter Poisson-Dirichlet models," Journal of Economic Dynamics and Control, Elsevier, vol. 32(1), pages 66-84, January.
    4. Aghion, Philippe & Howitt, Peter, 1992. "A Model of Growth through Creative Destruction," Econometrica, Econometric Society, vol. 60(2), pages 323-351, March.
    5. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-1370, November.
    6. Winter, S. G. & Kaniovski, Y. M. & Dosi, G., 2000. "Modeling industrial dynamics with innovative entrants," Structural Change and Economic Dynamics, Elsevier, vol. 11(3), pages 255-293, September.
    7. Aoki, Masanao, 2002. "Open models of share markets with two dominant types of participants," Journal of Economic Behavior & Organization, Elsevier, vol. 49(2), pages 199-216, October.
    8. Lucas, Robert E, Jr, 1973. "Some International Evidence on Output-Inflation Tradeoffs," American Economic Review, American Economic Association, vol. 63(3), pages 326-334, June.
    9. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
    10. Devroye, Luc, 1993. "A triptych of discrete distributions related to the stable law," Statistics & Probability Letters, Elsevier, vol. 18(5), pages 349-351, December.
    11. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
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    Citations

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    Cited by:

    1. Da Silva, Sergio, 2009. "Does Macroeconomics Need Microeconomic Foundations?," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy (IfW), vol. 3, pages 1-11.
    2. Wright, Ian, 2009. "Implicit Microfoundations for Macroeconomics," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy (IfW), vol. 3, pages 1-27.
    3. Aoki, Masanao & Yoshikawa, Hiroshi, 2009. "The nature of equilibrium in macroeconomics: A critique of equilibrium search theory," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy (IfW), vol. 3, pages 1-9.
    4. Yuji Aruka & Eizo Akiyama, 2009. "Non-self-averaging of a two-person game with only positive spillover: a new formulation of Avatamsaka’s dilemma," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 4(2), pages 135-161, November.
    5. Masanao Aoki, 2008. "Dispersion of growth paths of macroeconomic models in thermodynamic limits: two-parameter Poisson–Dirichlet models," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 3(1), pages 3-13, June.

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