Modeling the outofequilibrium dynamics of bounded rationality and economic constraints
Abstract
The analogies between economics and classical mechanics can be extended from constrained optimization to constrained dynamics by formalizing economic (constraint) forces and economic power in analogy to physical (constraint) forces in Lagrangian mechanics. In the differentialalgebraic equation framework of General Constrained Dynamics (GCD), households, firms, banks, and the government employ forces to change economic variables according to their desire and their power to assert their interest. These exante forces are completed by constraint forces from unanticipated system constraints to yield the expost dynamics. The flexible outofequilibrium model can combine Keynesian concepts such as the balance sheet approach and slow adaptation of prices and quantities with bounded rationality (gradient climbing) and interacting agents discussed in behavioral economics and agentbased models. The framework integrates some elements of different schools of thought and overcomes some restrictions inherent to optimization approaches, such as the assumption of markets operating in or close to equilibrium. Depending on the parameter choice for power relations and adaptation speeds, the model nevertheless can converge to a neoclassical equilibrium, and reacts to an austerity shock in a neoclassical or postKeynesian way.
 Publication:

arXiv eprints
 Pub Date:
 June 2021
 arXiv:
 arXiv:2106.00483
 Bibcode:
 2021arXiv210600483R
 Keywords:

 Economics  Theoretical Economics;
 Mathematics  Analysis of PDEs;
 Mathematics  Dynamical Systems;
 34A09;
 35F50;
 35Q91;
 37N40;
 91B66;
 9110
 EPrint:
 32 pages, 6 figures, 2 tables. An earlier version of this paper was published as: Oldenburg Discussion Papers in Economics 429, March 2020, https://hdl.handle.net/10419/214890