The main objective of EURACE in terms of economic policy analysis can be
summarized as follows:
- analyzing the effects of economic policy measures in a microfounded model that encompasses many realistic features which the modeling framework characterized by heterogeneous and interacting agents is able to address. Among them, it is worth mentioning the bounded-rationality and asymmetric information of economic agents, the agency of decentralized economic transactions which occurs out of equilibrium and are costly, the cascade effects due to agents interactions. A major problem arising in this setting is the problem of coordination of economic activity which is given for granted in current mainstream rational expectations macroeconomic models, but that indeed is crucial for businesscycles dynamics and so in policy design.
- analyzing the effects of economic policy measures in an economy with spatial structure consisting of a number of regions where distributions of the characteristics of economic agents in general differ between regions and the spatial flow of goods and production factors have substantial real effects.
- analyzing the interaction effects of policy measures of different types that are typically studied in isolation in mainstream analytical models.
- deriving normative insights for European policy making by calibrating the model using European data and incorporating regional differences in the characteristics of the potential flow of goods and factors between regions.
The types of policy measures that are considered are to a large extend the policy analysis employed in standard macroeconomic models. However, the modeling environment where policies are analyzed is challenging and new. The aim is to develop an agent-based model that allows to consider measures from fiscal and monetary policy as well as policies influencing the educational and skill level of the workforce. As pointed out above, the approach is a normative one in the sense that we try to determine the policy measures that yield "optimal" results in a spatial economy with heterogeneous agents, market frictions, transaction costs and cascade effects. A detailed consideration of how such policies can be optimally implemented within the institutional framework of the European Union and its member countries is outside the scope of this three-years project. The same holds true for considerations of institutional details and strategic considerations that influence the way policy decisions in this area are actually taken. Put differently, the EURACE project aims to build a macroeconomic model which, in its approach to policy analysis, outperforms existing dynamic macroeconomic models (e.g. dynamic general equilibrium models), being much richer than such models in the representation of economic interactions, the set of policy measures to be considered, and the reliability of results. Due to the modular structure of the platform, where the policy measures are executed by separate policy agents fiscal policy agent, monetary policy agent) the institutional side of the model with respect to policy determination and implementation can be much enriched. The policy experiments to be carried out in EURACE will be such that the policy variables executed by the policy agents are exogenously given and altered by the modeller but future work might design the policy agents in such a way that policy changes and endogenous and result from political processes.