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Relationship between EURACE modelling and the European economy

One of the main aims in building the EURACE platform is to derive an economic model which will ultimately deliver meaningful answers to a set of policy questions of particular interest in a European context. The selection of features and the degree of detail in the model are driven by these questions of particular importance for the European economy. One of these is for example the coexistence of a single central bank with several national governments (we do not model the EU as an agent but embody its redistributive and other relevant functions in the national governments). To obtain meaningful results we do not need to model all the European governments in detail, but governance heterogeneity among a few countries should suffice.

The model will be parameterized based on empirical studies for Europe whenever possible. The modelling choices in the various markets (worker mobility, debt equity ratio in firm capital structure, number of households active in the stock market, etc.), the spatial distribution of economic activities, will be Europe-driven. We will test whether our model delivers economically meaningful results against a selection of stylized facts for the European economy. In that way, our generic model will become distinctly European, and will serve to address European questions.

Expected economic insights

Due to the descriptive nature and rich features of the EURACE model, we expect to be able to gain more reliable results concerning the design and experimentation with macroeconomic policies than representative agent models. Since we include heterogeneity along the spatio-temporal dimension, specific policies can be focussed on particular agent characteristics, regarding its behaviour and geographic location. Also interaction between different types of policy measures can be analyzed taking into account endogenously emerging dynamic phenomena (e.g. contagion effects).

The added value in adopting the agent-based computational approach is its ability to take into account the important issue of heterogeneity among agents. According to mainstream representative agent models, economic policy is by definition uniform across agents, but agents are heterogeneous and interact one with each other and this fact has far reaching implications, see e.g. the causal effect between the financial fragility of firms and business fluctuations or between herding behaviour of traders and booms and crashes in financial markets.

The major applications that will be considered are related to monetary policy design and to fiscal and Research and Development policies in the Euro area. In particular, attention will be devoted to the study of monetary policies able to control inflation without affecting growth. Besides, computational experiments will be focused on implementing Research and Development and industrial policies aimed at boosting innovation and the adoption of new technologies according to the prescriptions set in the Lisbon Strategy. Furthermore, macroeconomic stabilization policies for the European economy in the case of exogenous shocks such as energy shocks or financial crises will be designed.

From a complex systems perspective we expect insights related to specific research questions concerning large-scale agent-based models. The question can be studied concerning the impact of population size on agent-based simulations: Do the model results scale, or do we get qualitatively different outcomes if the population size is increased? Other questions concern the simulation technology, and how we improve efficiency for running large-scale ABMs. We hope to contribute to the technological know-how on distributed, parallel simulations.