Lengnick's Baseline Economy Back to simulation
Classification tags: economics, minimal economy, DES, next-event time progression
Classification tags: economics, minimal economy, DES, next-event time progression
Lengnick's Baseline Economy (LBE) consists of two types of economic actors: households playing the roles of workers/employees and consumers, and firms playing the roles of employers and producers/suppliers. Households are characterized by their reservation wage defining their expectation on their wage, and their liquidity (amount of money). Firms are characterized by their liquidity, their consumption goods price, their wage rate and their inventory level.
At the start of a month, firms may adjust their wage rate and consumption goods price as well as their number of employees, while households may search for cheaper vendors and for a job (if unemployed) or a better paid job (if employed), as well as decide on their monthly consumption budget.
On each day, households purchase consumption goods and firms produce new consumption goods depending on their number of workers.
At the end of a month, firms distribute profits, pay wages, and decide about firing a worker. Households receive their wage and may adjust their reservation wage.
The model is based on discrete time with days as time units. A month consists of a StartOfMonth event followed by 21 EachDay events representing the 21 consecutive working days of a month, which are followed by an EndOfMonth event.
The model is composed of the object types Household and Firm as well as the event types StartOfMonth, EachDay and EndOfMonth.
The model's two object types, and their associations with each other, implemented in Firm.js and Household.js, are described in the following information design model:
T.B.D.
The OESjs simulation model implements the simulation design model presented above. It consists of two object class definitions, Firm.js and Household.js, three event class definitions, StartOfMonth.js, EachDay.js and EndOfMonth.js, and the simulation.js file. Altogether, the OESjs implementation has about 1,200 lines of JavaScript code, while the original implementation by M. Lengnick has about 2,100 lines of Java code.
LBE is able to self-organize to a state that is very close to a general equilibrium but shows a realistic amount of unemployment (real world economies show higher unemployment rates, partly due to structural unemployment, which has not been modeled in LBE). LBE shows that the interaction of economic agents following simple behavior rules can lead to an almost fully efficient allocation on the aggregate level (as an emergent property).
In classical economics models, which are, typically, Dynamic Stochastic General Equilibrium (DSGE) models, the empirical fact of a cyclical up and down of aggregate production (called business cycles) has been addressed by modeling exogenous shocks (technology shocks, cost shocks, news shocks, etc.) on the economy. In the LBE model, however, business cycles occur endogenously.
Business cycles are often understood as stochastic deviations around a trend in standard macro economics. In the LBE model they are a cyclical deviation downwards from the full employment level due to coordination failures of the economic agents. This difference is crucial when considering stabilization policy.
The Phillips Curve describes an empirical trade-off between unemployment and inflation. See Figure 5 in Lengnick (2013).
The Beveridge curve describes an empirical trade-off between unemployment and vacancies. See Figure 5 in Lengnick (2013).
According to [3] and [4], it is an empirical finding that the distribution of firm size is right skewed. See Figure 6 in Lengnick (2013).
According to [7] the frequency of price changes follows a right skewed distribution with median between 9 percent and 12 percent per month. See Figure 6 in Lengnick (2013).
According to [8] inflation tends to be below trend when GDP is above trend and increases in GDP tend to be followed by increases in prices. See Figure 7 in Lengnick (2013).
Increasing money supply in the very long run (50 and more years) creates only inflation and has no influence on the level of production. This is empirically confirmed in, e.g., [6] and [1]. See Figure 8 in Lengnick (2013).