Heterogeneous interacting agent models for understanding monetary economies

The representative agent (RA) approach of the mainstream economics allows a rich analysis of intertemporal maximization; but it rules out the possibility of the analysis of complex interactions. It is the latter that are at the root of this and other crises. We argue that the RA approach is simply not up to the task of enhancing our understanding of modern macroeconomies and that the standard cannot provide an adequate framework for understanding the economy even in more normal times.We advocate a bottom-up approach, where high-level (macroeconomic) systems may possess new and different properties than the low-level (microeconomic) systems on which they are based. The heterogeneous agent approach provides an alternative, one which has already proven its metal in helping us understand the interlinkages which helped give rise to the crisis. © 2011 EEA.