A new approach to business fluctuations: heterogeneous interacting agents, scaling laws and financial fragility

TL;DR

This paper introduces an agent-based model with heterogeneous agents and complex interactions that effectively replicates key stylized facts of business fluctuations, highlighting the importance of financial fragility and scaling laws.

Contribution

It presents a novel agent-based modeling approach that captures business fluctuations and stylized facts better than traditional macroeconomic models.

Findings

Replicates a wide range of stylized facts with high statistical accuracy

Highlights the role of financial fragility in business fluctuations

Demonstrates the effectiveness of heterogeneous agent interactions in macroeconomic modeling

Abstract

In this paper we discuss a scaling approach to business fluctuations. Our starting point consists in recognizing that concepts and methods derived from physics have allowed economists to (re)discover a set of stylized facts which have to be satisfactorily accounted for in their models. Standard macroeconomics, based on a reductionist approach centered on the representative agent, is definitely badly equipped for this task. On the contrary, we show that a simple financial fragility agent-based model, based on complex interactions of heterogeneous agents, is able to replicate a large number of scaling type stylized facts with a remarkable high degree of statistical precision.