Abstract
The main objective of the present paper is to investigate the role of the state of confidence in the macroeconomic dynamics of two interacting economies using the opinion dynamics approach by Weidlich and Haag (Concepts and models of a quantitative sociology. The dynamics of interacting populations. Springer, Berlin, 1983) and Lux (Econ J 105:881–889, 1995). Particularly, we assume that the overall state of confidence in the world (two-country) economy plays a role not only in the dynamics of the nominal exchange rate, but also in the dynamics of the real economy through the determination of aggregate investment, as already assumed by Taylor and O’Connell (Quart J Econ 100:871–886, 1985) and Franke and Semmler (Financial dynamics and business cycles: new perspectives. M.E. Sharpe, New York, pp 38–64, 1989). This novel feature allows us to consider far richer international macroeconomic interactions than most standard models. Further, it features wage-price dynamics that interact with output and employment fluctuations—leading to a Goodwin (Socialism, capitalism and economic growth. Cambridge University Press, Cambridge, pp 54–58, 1967)-type of distributive cycle—, as well as debt dynamics due to a credit-financed investment behavior. The resulting framework is both advanced as well as flexible enough to generate various types of persistent fluctuations, and also complex dynamics.
This is a preview of subscription content, log in via an institution to check access.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Notes
- 1.
Indeed, the analysis of such international interactions has been based over the last decades—and hand in hand with increasing predominance of the neoclassical rational expectations approach following the work by Lucas (1976)—on the presumption of rational agents, see e.g. Frenkel and Razin (1985) and Corden (1985), with the outcome that the resulting theoretical frameworks—being the New Open Economy Macroeconomics (NOEM) approach developed by Obstfeld and Rogoff (1995) the most recent incarnation—suggest an inherent and often misleading stability of such international interactions.
- 2.
See Taylor and O’Connell (1985) and Franke and Semmler (1989), for two early contributions thematizing the role of the state of confidence for the economy’s dynamics and stability, as well as Franke (2012) and Flaschel et al. (2015) for other macroeconomic models along the lines of the present paper.
- 3.
For a more elaborate framework along the same modeling lines where the interconnectedness of a high-income and a low-income labor markets is explicitly modeled, see Charpe et al. (2015).
- 4.
Note that by denoting with y the actual output-capital ratio, it holds for the utilization rate of capital that u = Y∕Y p = y∕y p.
- 5.
Obviously, this is only one possible formalization of the dynamics of aggregate expectations in markets with heterogeneous agents, and alternative approaches can be proposed (see, for example, the approach adopted by De Grauwe and Grimaldi (2006) in their analysis of the behaviour of agents on foreign exchange markets). Yet, we regard Eq. (13) as a very parsimonious way of capturing both the influence of aggregate observed variables and the role of heterogeneity and self-driving forces in expectation formation.
- 6.
As in Franke (2012), we assume that N is large enough so that the intrinsic noise from different realisations when individual agents apply their random mechanism can be neglected.
- 7.
This law of motion is derived in detail in Franke (2012) and its use of the exponential terms guarantees that neither the chartist nor the fundamentalist group can be totally eliminated in the FX-market.
- 8.
As fundamentalist form their expectations in a simple regressive way, these expectations do not really show up in the formation of averages and the average expectation of their formation.
- 9.
The economic rationale for this exchange rate specification can be related with the economy’s balance of payments—which comprises the trade as well as the capital accounts—, namely
$$\displaystyle\begin{array}{rcl} NX + (r^{{\ast}}-\hat{\eta })B_{ b} - (r -\hat{ p})B_{a}^{{\ast}}& =& \eta \dot{B}_{ b} -\dot{ B}_{a}^{{\ast}}, {}\\ \end{array}$$where B b and B a the domestic economy’s holdings of foreign and domestic bonds, respectively. As it should be clear, trading recorded in the trade and the capital accounts does not have to follow the same rationale or rules, and may therefore be modelled independently.
- 10.
Note that capital gain expectations are zero in the inflation-free steady state of the whole model.
- 11.
This is an important feature of the present model as in purely demand-driven models the spending multiplier is typically an increasing function of the marginal propensities to consume. However, the present framework does not only consider aggregate demand, but also income distribution.
- 12.
All simulations were computed using the SND software, see Chiarella et al. (2002). The programming code is available upon request from the authors.
- 13.
References
Acemoglu, D., & Ozdaglar, A. (2011). Opinion dynamics and learning in social networks. Dynamic Games and Applications, 1(1), 3–49.
Charpe, M., Flaschel, P., Krolzig, H. M., Proaño, C. R., Semmler, W., & Tavani, D. (2015). Credit driven investment, heterogenous labor markets and macroeconomic dynamics. Journal of Economic Interaction and Coordination, 10(1), 163–181.
Chiarella, C., & Flaschel, P. (2000). The dynamics of Keynesian monetary growth: Macrofoundations. Cambridge: Cambridge University Press.
Chiarella, C., Flaschel, P., & Franke, R. (2005). Foundations for a disequilibrium theory of the business cycle. Quantitative analysis and qualitative assessment. Cambridge: Cambridge University Press.
Chiarella, C., Flaschel, P., Khomin, A., & Zhu, P. (2002). The SND package. Applications to Keynesian monetary growth dynamics. Dynamic economic theory series (Vol. 22). Frankfurt am Main: Peter Lang.
Corden, W. (1985). Macroeconomic policy interaction under flexible exchange rates: A two-country model. Economica, 52, 9–23.
De Grauwe, P., & Grimaldi, M. (2006). The exchange rate in a behavioral framework. Cambridge: MIT Press.
Flaschel, P., Hartmann, F., Malikane, C., & Proaño, C. R. (2015). A behavioral macroeconomic model of exchange rate fluctuations with complex market expectations formation. Computational Economics, 45(4), 669–691.
Flaschel, P., & Krolzig, H. M. (2006). Wage–price Phillips curves and macroeconomic stability: Basic structural form, estimation and analysis. In: C. Chiarella, P. Flaschel, R. Franke, & W. Semmler (Eds.), Quantitative and empirical analysis of nonlinear dynamic macromodels. Amsterdam: Elsevier.
Franke, R., Flaschel, P., & Proaño, C. R. (2006). Wage–price dynamics and income distribution in a semi-structural Keynes–Goodwin model. Structural Change and Economic Dynamics, 17(4), 452–465.
Franke, R. (2012). Microfounded animal spirits in the new macroeconomic consensus. Studies in Nonlinear Dynamics and Econometrics, 16(4), 1–39.
Franke, R., & Semmler, W. (1989). Debt financing of firms, stability and cycles in a dynamical macroeconomic growth model. In W. Semmler (Ed.), Financial dynamics and business cycles: New perspectives (pp. 38–64). New York: M.E. Sharpe.
Frenkel, J. A., & Razin, A. (1985). A two-country model of macroeconomic policy interaction. In W. Buiter, R. Marston (Eds.), International economic policy coordination (pp. 37–83). Cambridge: Cambridge University Press.
Frydman, R., & Phelps, E. S. (2013). Rethiking expectations. The way forward for macroeconomics. Princeton: Princeton University Press.
Goodwin, R. (1967). A growth cycle. In C. H. Feinstein (Ed.), Socialism, capitalism and economic growth (pp. 54–58). Cambridge: Cambridge University Press.
Keynes, J. M. (1936). The general theory of employment, interest and money. London: Macmillan.
Lucas, R. E. J. (1976). Econometric policy evaluation: A critique. In Carnegie-Rochester Conference Series on Public Policy (Vol. 1, pp. 19–46).
Lux, T. (1995). Herd behaviour, bubbles and crashes. Economic Journal, 105, 881–889.
Lux, T. (2009). Rational forecasts or social opinion dynamics? Identification of interaction effects in a business climate survey. Journal of Economic Behavior & Organization, 72(2), 638–655.
Muth, J. F. (1961). Rational expectations and the theory of price movements. Econometrica, 29, 315–335.
Obstfeld, M., & Rogoff, K. (1995). Exchange rate dynamics redux. The Journal of Political Economy, 103(3), 624–660.
Proaño, C. R. (2009). (De-)stabilizing international macroeconomic interactions in an estimated model of the U.S. and the Euro area. International Economics and Economic Policy, 6(4), 421–443.
Proaño, C. R. (2011). Exchange rate determination, macroeconomic dynamics and stability under heterogeneous behavioral FX expectations. Journal of Economic Behavior and Organization, 77(2), 177–188.
Taylor, L., & O’Connell, S. (1985). A Minsky crisis. Quarterly Journal of Economics, 100, 871–886.
Weidlich, W., & Haag, G. (1983). Concepts and models of a quantitative sociology. The dynamics of interacting populations. Berlin: Springer.
Author information
Authors and Affiliations
Corresponding author
Editor information
Editors and Affiliations
Rights and permissions
Copyright information
© 2016 Springer International Publishing Switzerland
About this chapter
Cite this chapter
Charpe, M., Chiarella, C., Flaschel, P., Proaño, C.R. (2016). Business Confidence and Macroeconomic Dynamics in a Nonlinear Two-Country Framework with Aggregate Opinion Dynamics. In: Bernard, L., Nyambuu, U. (eds) Dynamic Modeling, Empirical Macroeconomics, and Finance. Springer, Cham. https://doi.org/10.1007/978-3-319-39887-7_12
Download citation
DOI: https://doi.org/10.1007/978-3-319-39887-7_12
Published:
Publisher Name: Springer, Cham
Print ISBN: 978-3-319-39885-3
Online ISBN: 978-3-319-39887-7
eBook Packages: Economics and FinanceEconomics and Finance (R0)