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Volume 6, Issue 1

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Endogenous Heterogeneity, the Propagation of Information and Macroeconomic Complexity

Gomes, Orlando

Year: 2012   Volume: 6   Issue: 1   Pages: 38-58

Abstract: The economy is an adaptive and evolving complex system. The recognition of this fact has produced, over the last few years, a gradual but firm shift on the direction taken by mainstream economic thought. The representative agent paradigm is giving place to settings of interacting heterogeneous agents, capable of generating dynamic outcomes that are unique for each assumed pattern of interaction. The complexity era, as it is called, requires original insights and innovative approaches, in order to reinterpret the economic reality. This paper intends to contribute to the complexity literature in economics by exploring a popular macroeconomic model (the sticky-information model) from a new angle. Information acquisition by price-setting firms will be endogenously determined in two steps: (i) the competition between almost identical media leads to an irregular pattern of information creation; (ii) once created, information spreads throughout the interested audience following a diffusion process. The consequence is an erratic aggregate pattern of information acquisition that has consequences at a macro level, namely concerning the shape of the Phillips curve, which will change every period. Heterogeneity, self-organization, evolution and out-of-equilibrium dynamics are features that allow to classify the suggested framework as a setting of macroeconomic complexity.

JEL classification: E30, E52, D83, D84

Keywords: Complexity, information production and diffusion, heterogeneity, sticky-information, nonlinear dynamics

RePEc: http://ideas.repec.org/a/fau/aucocz/au2012_038.html

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