Representative Agent in Macroeconomics (Routledge Frontiers by James E Hartley

By James E Hartley

Rpresentative agent versions became a foremost technique of learning the macroeconomy in sleek economics with out there being a lot dialogue within the literature approximately their propriety or usefulness. This quantity evaluates using those types in macroeconomics, analyzing the reasons for his or her use and concluding that consultant agent versions are neither a formal nor a very necessary technique of learning mixture behaviour.

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In it, Lucas considers it proper to hold taste and technology parameters constant in the hope that they are invariant. The contention of this chapter is that such hopes are in vain. Furthermore, Lucas’ 1981 argument that the invariance of taste and technology parameters should be decided on empirical grounds is in fundamental contradiction to the underlying premise of his 1976 paper. 2 Lucas, however, is reduced to arguing that as a theoretical matter one class of parameters cannot be held constant, but as an empirical matter another class of parameters may be held constant.

Such an argument seems familiar to modern economists. Nowadays, economists seem to have an instinctual belief that macroeconomics is in need of a microeconomic foundation. This belief in the necessity of microfoundations undoubtedly stems from the seemingly trite observation that only humans can act. All macroeconomic events are the accumulation of millions of decisions made by individual people. From this observation, it seems to follow immediately that if we are ever going to understand the macroeconomy, we need to understand the microeconomic behavior which forms its basis.

This means that there is a theoretical presumption that historical econometric estimates of such decision rules will provide poor predictions about behavior in a hypothetically new environment. , p. 216, emphasis added) Note specifically the last sentence. There is a “theoretical presumption” that all estimates of parameters derived from historical evidence will change with regimes. We thus have here a very explicit outline of the exacting requirements of a good model. Sargent proceeds to develop a representative agent model which he claims lives up to these standards and thus provides a solid basis for modeling.

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