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Modeling the out-of-equilibrium dynamics of bounded rationality and economic constraints

Author

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  • Oliver Richters

    (University of Oldenburg, Department of Economics)

Abstract
The mathematical 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 a differential-algebraic equation framework, households, firms, banks, and the government employ forces to change economic variables according to their desire and their power to assert their interest. These ex-ante forces are completed by constraint forces from unanticipated system constraints to yield the ex-post dynamics. The out-of-equilibrium model combines Keynesian concepts such as the balance sheet approach and slow adaptation of prices and quantities with bounded rationality (gradient climbing) discussed in behavioral economics and agent-based models. Depending on the power relations and adaptation speeds, the model converges to a neoclassical equilibrium or not. The framework integrates different schools of thought and overcomes some restrictions inherent to optimization approaches, such as the problem of aggregating individual behavior into macroeconomic relations and the assumption of markets operating in or close to equilibrium.

Suggested Citation

  • Oliver Richters, 2020. "Modeling the out-of-equilibrium dynamics of bounded rationality and economic constraints," Working Papers V-429-20, University of Oldenburg, Department of Economics, revised Mar 2020.
    • Handle: RePEc:old:dpaper:429
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    Cited by:

    1. Glötzl, Erhard, 2022. "Macroeconomic General Constrained Dynamic models (GCD models)," MPRA Paper 112385, University Library of Munich, Germany.
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    3. Glötzl, Erhard, 2022. "General Constrained Dynamic (GCD) models with intertemporal utility functions," MPRA Paper 112387, University Library of Munich, Germany.
    4. Yanovski, Boyan & Tahri, Ibrahim & Lessmann, Kai, 2024. "Green transition and macroeconomic stabilization," Journal of Economic Behavior & Organization, Elsevier, vol. 221(C), pages 586-601.
    5. Glötzl, Erhard & Glötzl, Florentin & Richters, Oliver & Binter, Lucas, 2023. "General Constrained Dynamic Models in Economics - General Dynamic Theory of Economic Variables - Beyond Walras and Keynes," MPRA Paper 118314, University Library of Munich, Germany.
    6. Richters, Oliver, 2020. "Between bounded rationality and economic imperatives: essays on out-of-equilibrium dynamics," EconStor Theses, ZBW - Leibniz Information Centre for Economics, number 228534, September.

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    More about this item

    Keywords

    Simultaneous Equation Models; Stability of Equilibrium; Balance Sheet Approach; Constrained Dynamics; Out-of-equilibrium Dynamics; Lagrangian mechanics.;
    All these keywords.

    JEL classification:

    • A12 - General Economics and Teaching - - General Economics - - - Relation of Economics to Other Disciplines
    • B13 - Schools of Economic Thought and Methodology - - History of Economic Thought through 1925 - - - Neoclassical through 1925 (Austrian, Marshallian, Walrasian, Wicksellian)
    • C30 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - General
    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
    • E70 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics - - - General

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