Output and price behaviour in a system dynamics model

This paper introduces a small-scale experimental model intended as a first stage to developing a fully-fledged system dynamics macroeconomic model of a new generation. The model economy incorporates important real-world features that are missing in the mainstream macroeconomic literature. The agents representing the demand and supply side dispose over a limited information set. Their interactions are not constrained by a priori imposition of equilibrium conditions. The exercise shows that, unlike in general equilibrium models, booms and busts in output and price endogenously arise due to the stock variable representation of demand and supply and modelling the agents’ decisions as autonomous. It is also demonstrated that bad times and good times are driven by the same causal mechanisms. The insights are paramount for an appropriate understanding of the true possibilities of macroeconomic policies and provide fruitful material for further exploration.System dynamics, Stock variables, Disequilibrium model, Bounded rationality, Backward looking solution