WP3 Agent-based model of the macro-economy (MABM), with two-way coupling to the financial model above, containing all the key elements involved in the crisis, modelled at a fine-grained level. This will include individual households, with heterogeneous wealth. Each household can in turn be broken down into its role as a consumer, its ability to provide labour, and the house itself. Another key element is firms, who provide labour and produce goods which are consumed by the households. Both households and firms will interact with the banks in the financial model, who will provide mortgages to households and loans to firms. Finally regulators will set policies such as interest rates or collateral requirements.

 

The MABM model will be built in three iterations. The first iteration, MABM Mark I, will be an extension of the pre-existing models of the UCSC group which already include households, firms, and banks, to include a more sophisticated model of the housing market, and an improved model of the transmission of stress in the financial sector to the real economy. Here the project will benefit from its sister American project, which is closely focused on building a model of the housing bubble; in contrast, the UCSC model has a much better articulated model of firms and the effect of credit on production. In constructing MABM Mark I these two efforts will be merged.

MABM Mark I will also provide a baseline model to serve as the prototype plug in for the on-line

game and the simulator to be developed in WPs 4 and 5.

 

MABM Mark II will marry the macro model to the finance model thus capturing the essential network structure of both the financial economy and the real economy. In developing Mark II the harmonized financial model will be used in order to make the model of banks more realistic; furthermore, detailed data on input-output relationships between sectors (which serve as a crude characterization of the production of goods) will also be used to render the model of the real economy more realistic.

 

MABM Mark III will focus on bringing on board some of the diversity – both institutional and economic - characterizing the European economy on the eve of the crisis. This includes both national fiscal policies vs common monetary policy, heterogeneous export performance and competitiveness under the Euro, and differential exposure of the banking system to national conditions. The foundations for this will already be present in Mark II, where input-output relationships will be assessed. In Mark III government bond markets will be added, so as to simulate international differences in the availability of credit and their effect on the underlying economies. With its sophisticated graphical interface the resulting Mark III model will provide the foundation for a simulator that will allow a policymaker to get insight into diverse scenarios, such as the effect of fluctuations in interest rates or balance of payments on factors such as GDP and unemployment.

 

In brief, the objectives that WP3 has to meet are the following:

• to build the baseline AB model, MABM mark I, capable of capturing the features of the macro-economy which are deemed essential in order to model the occurrence of a financial crisis and its macroeconomic repercussions.;

• to extend the baseline model in order to develop MABM mark II, characterized by a richer and more realistic architecture of the corporate sector and/or of the financial side of the economy. This benchmarking to observed financial and production networks will further detail the gradual cascading aspect of a financial crisis by looking at the sectoral propagation of shocks;

• to devise a multi-country architecture of MABM, i.e. MABM mark III, which will be the most appropriate for exploring the European economy.