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

  • Aoki, Masanao
  • Yoshikawa, Hiroshi

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 accurate 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.

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Paper provided by Kiel Institute for the World Economy in its series Economics Discussion Papers with number 2007-49.

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Date of creation: 2007
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Handle: RePEc:zbw:ifwedp:6807
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  1. Lucas, Robert E, Jr, 1973. "Some International Evidence on Output-Inflation Tradeoffs," American Economic Review, American Economic Association, vol. 63(3), pages 326-34, June.
  2. S.G. Winter & Y.M. Kaniovski & G. Dosi, 1998. "Modeling Industrial Dynamics with Innovative Entrants," Working Papers ir98022, International Institute for Applied Systems Analysis.
  3. Aghion, P. & Howitt, P., 1989. "A Model Of Growth Through Creative Destruction," Working papers 527, Massachusetts Institute of Technology (MIT), Department of Economics.
  4. Plosser, C.I., 1989. "Understanding Real Business Cycles," RCER Working Papers 198, University of Rochester - Center for Economic Research (RCER).
  5. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November.
  6. Devroye, Luc, 1993. "A triptych of discrete distributions related to the stable law," Statistics & Probability Letters, Elsevier, vol. 18(5), pages 349-351, December.
  7. Masanao Aoki, 2006. "Thermodynamic Limits of Macroeconomic or Financial Models: One-and Two-Parameter Poisson-Dirichlet Models," CIRJE F-Series CIRJE-F-445, CIRJE, Faculty of Economics, University of Tokyo.
  8. Romer, Paul M, 1986. "Increasing Returns and Long-run Growth," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 1002-37, October.
  9. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
  10. Masanao Aoki, 2002. "Open Models of Share Markets with Two Dominant Types of Participants," UCLA Economics Online Papers 107, UCLA Department of Economics.
  11. Aghion, Philippe & Howitt, Peter, 1992. "A Model of Growth Through Creative Destruction," Scholarly Articles 12490578, Harvard University Department of Economics.
  12. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
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