nep-cmp New Economics Papers
on Computational Economics
Issue of 2013‒07‒15
thirteen papers chosen by
Stan Miles
Thompson Rivers University

  1. Algorithm of construction of Optimum Portfolio of stocks using Genetic Algorithm By Sinha, Pankaj; Chandwani, Abhishek; Sinha, Tanmay
  2. Monetary Policy and Debt Deflation: Some Computational Experiments By Carl Chiarella; Corrado Di Guilmi
  3. How Inflation Affects Macroeconomic Performance: An Agent-Based Computational Investigation By Quamrul Ashraf; Boris Gershman; Peter Howitt
  4. Long-run Economic Impacts of Thai Flooding: Geographical Simulation Analysis By Ikumo Isono; Satoru Kumagai
  5. Consistent Estimation of Agent-Based Models by Simulated Minimum Distance. By Jakob Grazzini; Matteo G. Richiardi
  6. Trade and agricultural employment linkages in general equilibrium modelling By Vanzetti, David; Peters, Ralf
  7. An Analysis of Benefit Flows in New Zealand using a Social Accounting Framework By Aziz, Omar; Carroll, Nick; Creedy, John
  8. The impact of an increase in the legal retirement age on the effective retirement age By Noelia BERNAL; Frederic VERMEULEN
  9. Social Learning about Consumption By Isabelle Salle; Pascal Seppecher
  10. Dawei revisited: Reaffirmation of the importance of the project in the era of reforms in Myanmar By Ikumo Isono; Satoru Kumagai
  11. Policy Design, Eco-innovation and Industrial Dynamics in an Agent-Based Model: An Illustration with the REACH Regulation By Nabila Arfaoui; Eric Brouillat; Maïder Saint-Jean
  12. Real and financial crises By Mark Setterfield; Bill Gibson
  13. Endogenous Participation in a Partial Climate Agreement with Open Entry: A Numerical Assessment By Fabio Sferra; Massimo Tavoni

  1. By: Sinha, Pankaj; Chandwani, Abhishek; Sinha, Tanmay
    Abstract: The objective of this paper is to develop an algorithm to create an Optimum Portfolio from a large pool of stocks listed in a single market index SPX 500 Index: USA (for example) using Genetic Algorithm. The algorithm selects stocks on the basis of a priority index function designed on company fundamentals, and then genetically assigns optimum weights to the selected stocks by finding a genetically suitable combination of return and risk on the basis of historical data. The effect of genetic evolution on portfolio optimization has been demonstrated by developing a MATLAB code to implement the genetic application of reproduction, crossover and mutation operators. The effectiveness of the obtained portfolio has been successfully tested by running its performance over a six month holding period. It is found that genetic algorithm is successful in providing the optimum weights to stocks which were initially screened through a predetermined priority index function. The constructed portfolio beats the market for the considered holding period by a significant margin.
    Keywords: Optimum Portfolio, Genetic Algorithm, Portfolio Construction, MATLAB
    JEL: C6 C61 C63 G11
    Date: 2013–07–10
  2. By: Carl Chiarella; Corrado Di Guilmi
    Abstract: The paper presents an agent based model to study the possible effects of different fiscal and monetary policies in the context of debt deflation. We introduce a modified Taylor rule which includes the financial position of firms as a target. Monte Carlo simulations show that an excessive sensitivity of the central bank to inflation, the output gap and firms' debt can have undesired and destabilising effects on the system, while an active fiscal policy appears to be able to effectively stabilise the economy. The paper also addresses the puzzle of low inflation during stock market booms by testing different behavioural rules for the central bank. We find that, in a context of sticky prices and volatile expectations, endogenous credit can be identified as the main source of the divergent dynamics of prices in the real and financial sector.
    Keywords: Financial fragility, monetary policy, debt deflation, agent based modelling, complex dynamics.
    JEL: E12 E31 E44
    Date: 2013–07
  3. By: Quamrul Ashraf; Boris Gershman; Peter Howitt
    Abstract: We use an agent-based computational approach to show how inflation can worsen macroeconomic performance by disrupting the mechanism of exchange in a decentralized market economy. We find that, in our model economy, increasing the trend rate of inflation above 3 percent has a substantial deleterious effect, but lowering it below 3 percent has no significant macroeconomic consequences. Our finding remains qualitatively robust to changes in parameter values and to modifications to our model that partly address the Lucas critique. Finally, we contribute a novel explanation for why cross-country regressions may fail to detect a significant negative effect of trend inflation on output even when such an effect exists in reality.
    Keywords: Agent-based computational model, inflation, price dispersion, firm turnover
    JEL: C63 E00 E31 E50
    Date: 2013
  4. By: Ikumo Isono (Economic Research Institute for ASEAN and East Asia); Satoru Kumagai (Institute of Developing Economies, Japan External Trade Organization (IDEJETRO))
    Abstract: We discuss the long-run economic impact of natural disasters on the countries concerned by examining the case of Thai flooding in 2011. If the damage caused by disasters is really serious, industries will move out from the countries in question, and this outflow leads to a negative impact on the national economies in the long run. By using IDE/ERIA-GSM and utilizing short-run forecast for the basic setting, we estimate the seriousness of the flooding in terms of the long-term economic performance. Simulation results show that negative long-run impacts of the flood will be moderate, because many companies’ first reaction to the flood was to seek possible relocation of their production sites within Thailand
    Keywords: Thailand, flood, new economic geography, computable general equilibrium models, disaster management
    JEL: O53 Q54 R13
    Date: 2013–07
  5. By: Jakob Grazzini; Matteo G. Richiardi
    Abstract: Agent-based (AB) models are considered a promising tool for macroeconomic analysis. However, until estimation of AB models become a common practice, they will not get to the center stage of macroeconomics. Two difficulties arise in the estimation of AB models: (i) the criterion function has no simple analytical expression, and (ii) the aggregate properties of the model cannot be analytically understood. The first one calls for simulation-based estimation techniques; the second requires additional statistical testing in order to ensure that the simulated quantities are consistent estimators of the theoretical quantities. The possibly high number of parameters involved and the non-linearities in the theoretical quantities used for estimation add to the complexity of the problem. As these difficulties are also shared, though to a different extent, by DSGE models, we first look at the lessons that can be learned from this literature. We identify simulated minimum distance (SMD) as a practical approach to estimation of AB models, and we discuss the conditions which ensure consistency of SMD estimators in AB models.
    Keywords: Consistent Estimation, Method of Simulated Moments, Agent-based Models
    JEL: C15 C63
    Date: 2013
  6. By: Vanzetti, David; Peters, Ralf
    Abstract: Trade negotiators are frequently concerned about the possible negative effects of trade liberalisation on employment in specific sectors. The agricultural sector in developing countries has characteristics that make it different from industrial or service sectors. These characteristics are an informal labour force, low productivity, absence of regulations and a tie to land. These features affect adjustment costs. A global computable general equilibrium model, GTAP, is used to analyse employment and wage effects of trade liberalization in three developing countries — Indonesia, Bangladesh and Guatemala. The ability to fully utilize all resources, including labour, is important. The results highlight the advantage of a functioning and flexible labour market that can readily adjust to trade shocks.
    Keywords: agriculture, trade, employment, Agricultural and Food Policy, International Relations/Trade, F13, Q17,
    Date: 2013–02
  7. By: Aziz, Omar; Carroll, Nick; Creedy, John
    Abstract: This paper presents a social accounting model to examine the entrants, exits and transitions of individuals among a wide range of benefit categories in New Zealand. Transition rates and flows are estimated separately for periods before the global financial crisis (GFC) and periods following the crisis. The data were obtained from the Benefit Dynamics Dataset maintained by the Ministry of Social Development. The model is used to examine, using simulations, the implications for the time profile of changes in the stock of benefit recipients under a range of counterfactual situations. It is suggested that the model can provide a useful tool for policy analysis.
    Keywords: Welfare benefits, Social accounting,
    Date: 2013
  8. By: Noelia BERNAL; Frederic VERMEULEN
    Abstract: We analyze the impact of an increase in the legal retirement age on the effective retirement age in the Netherlands. We do this by means of a dynamic programming model for the retirement behavior of singles. The model is applied to new administrative data that contain very accurate and detailed information on individual incomes and occupational pension entitlements. Our model is able to capture the main patterns observed in the data. We observe that as individuals get older their labor supply declines considerably and this varies by health status. We simulate a soon to be implemented pension reform which aims at gradually increasing the legal retirement age from 65 to 67. The simulation results show a rather small impact on the effective retirement age. Individuals postpone their retirement by only 3 months on average, while differences across individuals mainly depend on their health status.
    Date: 2013–02
  9. By: Isabelle Salle; Pascal Seppecher
    Abstract: This paper applies a parsimonious learning model to the optimal consumption rule of Allen & Carroll (2001), and delivers convincing convergence dynamics towards the optimal rule within a limited amount of time. These findings constitute a significant improvement regarding previous results in the literature, both in terms of speed of convergence and parsimony of the learning model. The social learning model exhibits several appealing features: it is frugal (involving only two free parameters), easy to apply to a range of learning objectives, requires few procedures and little information. Particular care is given to behavioural interpretation of the modelling assumptions in light of evidence from the fields of psychology and social science. Our results highlight the need to depart from the genetic metaphor, and account for intentional decision-making, based on agents' relative performances. By contrast, we show that convergence is strongly hindered by exact imitation processes, or random exploration mechanisms, which are usually assumed when modelling social learning behaviour. Our results suggest a method for modelling bounded rationality, which could be tested most interestingly within the framework of a wide range of economic models with adaptive dynamics.
    Keywords: learning, bounded rationality, evolutionary algorithms, consumption rule
    JEL: D83 D91 C63 E21
    Date: 2013–05
  10. By: Ikumo Isono (Economic Research Institute for ASEAN and East Asia); Satoru Kumagai (Institute of Developing Economies, Japan External Trade Organization (IDEJETRO))
    Abstract: Myanmar has entered a new era of all-round reforms. Donors and foreign investors are mainly interested in Yangon, while there has been a delay in the Dawei deep sea project, the Dawei Special Economic Zone project and the road connection to Thailand. The change in circumstances poses a question about whether the Dawei project is still needed in the era of a reforming Myanmar. Our geographical simulation analysis clearly shows that the Dawei project has significant additional benefit for the whole Mekong region and points out the importance of international cooperation.
    Date: 2013–05
  11. By: Nabila Arfaoui; Eric Brouillat; Maïder Saint-Jean
    Abstract: This paper proposes an agent-based model to study the impact of European regulation REACH on industrial dynamics. This new regulation adopted in 2007 establishes a new philosophy in how to design environmental protection and health. For this reason, REACH appears as a privileged object of study to analyze the impact of regulation on innovation strategies of firms and the structure of market. Our model focuses on the interactions between clients and suppliers in order to take into account interdependencies in the heart of vertical relationships that are upset by the new principles introduced by REACH. The main contribution of this paper is to show, through an agent-based model, how different combinations of flexible and stringent instruments designed on REACH regulation (Extended Producer Responsibility, authorization process and restrictions) create the incentives and the constraints to shape market selection and innovation.
    Keywords: REACH
    Date: 2013–06
  12. By: Mark Setterfield (Department of Economics, Trinity College); Bill Gibson (Department of Economics,)
    Abstract: Previous analyses of macroeconomic imbalances have employed models that either focus exclusively on real-side e?ects or financial-side disturbances. Structuralist models make the highly unrealistic assumption that financial surplus firms e?ortlessly and costlessly transfer those surpluses to deficit firms, which require additional savings to sustain their plans for capital accumulation. On the other hand, there exists a well-developed, rigorous and elegant literature that uses the multi-agent systems (MAS) approach to analyze the recent financial crisis. This literature focuses exclusively on the financial sector to the neglect of the real economy. In this paper, we build on the MAS model of Setterfield and Budd (2011), relaxing some of the restrictive assumptions regarding the goods market in that model, and adding a financial sector. The latter is inspired by the financial models of Johansen et al. (2000), Sornette (2003), Voit (2005), LeBaron (2012), Thurner et al. (2012), and others. The result is a robust model of the economy in which the real and financial sectors are integrated and interact with one another. The contribution is to show that real financial interactions increase the likelihood of crises, while preferentially attached financial networks decrease financial instability.
    Keywords: Stock market; Crash; Bubbles; Herding; Adaptation; Agent-based models
    JEL: D58 G01 G12 B16 C00
    Date: 2013–07
  13. By: Fabio Sferra (Fondazione Eni Enrico Mattei, Euro-Mediterranean Center on Climate Change, Italy); Massimo Tavoni (Fondazione Eni Enrico Mattei, Euro-Mediterranean Center on Climate Change, Italy)
    Abstract: Our purpose is to analyse the effectiveness and efficiency of a Partial Climate Agreement with open entry under a non-cooperative Nash-Equilibrium framework. We evaluate a partial agreement policy in which non-signatory countries can decide to join or to leave a coalition of the willing at any point in time. By means of a simple analytical model and of a numerical integrated assessment model, we assess different coalition structures, and different minimum admission requirements. Our results indicate that a Partial Climate Agreement with open entry can be effective, achieving climate stabilization between 2C and 3C depending on the composition of the coalition of the willing. The policy turns out to be also rather efficient, with only minor losses with respect to a full cooperation agreement. Finally, we quantify the optimal admission requirement in about 40-50% of cumulative abatement.
    Keywords: International Environmental Agreements, Non-Binding Targets, Voluntary Climate Change Actions, Optimal Mitigation Strategies, Fair Burden Sharing in Climate Negotiations, Carbon Leakage
    JEL: C72 F18 Q54
    Date: 2013–06

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