Nonlinear Dynamics, Psychology, and Life Sciences, Vol. 21, Iss. 3, July, 2017, pp. 359-386
@2017 Society for Chaos Theory in Psychology & Life Sciences


Nonlinearities in Behavioral Macroeconomics

Orlando Gomes, Lisbon Accounting and Business School (ISCAL-IPL) & Business Research Unit (UNIDE-ISCTE/IUL), Portugal

Abstract: This article undertakes a journey across the literature on behavioral macroeconomics, with attention concentrated on the nonlinearities that the behavioral approach typically suggests or implies. The emphasis is placed on thinking the macro economy as a living organism, composed of many interacting parts, each one having a will of its own, which is in sharp contrast with the mechanism of the orthodox view (well represented by the neoclassical or new Keynesian dynamic stochastic general equilibrium - DSGE - model). The paper advocates that a thorough understanding of individual behavior in collective contexts is the only possible avenue to further explore macroeconomic phenomena and the often observed “anomalies” that the benchmark DSGE macro framework is unable to explain or justify. After a reflection on the role of behavioral traits as a fundamental component of a new way of thinking the economy, the article proceeds with a debate on some of the most relevant frameworks in the literature that somehow link macro behavior and nonlinearities; covered subjects include macro models with disequilibrium rules, agent-based models that highlight interaction and complexity, evolutionary switching frameworks, and inattention based decision problems. These subjects have, as a fundamental point in common, the use of behavioral elements to transform existing interpretations of the economic reality, making it more evident how irregular fluctuations emerge and unfold on the aggregate.

Keywords: behavioral macroeconomics, nonlinear dynamics, complex systems, local interaction