A promising development in economics is the development and use of computational experiments. This entails computing the equilibrium process for a well specified model economy. These methods have been used to address various economic questions such as the dead weight loss associated with various tax schemes or the quantitative contributions of various stochastic disturbances to the business cycle. But previously, the application of these methods has typically used a representative agent or deterministic economy. Some heterogeneous agent economies are known to behave as if there were a single standing household. For addressing some questions, however, the justification for the use of a standing agent abstract is dictated purely by computational considerations. Recent findings that show that standing agent economies underestimate the cost of inflation by a factor of three, and this suggests that for most issues in monetary economics, heterogeneous agent economies are needed. The investigator has developed practical computational methods for analyzing multi-agent economies, and one part of this project will apply these methods to study such economies with explicit stochastic monetary policy rules. This analysis will provide a better understanding of the relationship between the monetary and real sectors. The second part of the project will exploit recent developments in general equilibrium theory to develop a way to measure the output of the financial intermediation sector. These methods entail the hedonic pricing of complex contracts. Using these same theoretical advances, an analysis of economies, in which both the number of workers operating each plant and the number of hours each plant is operated can be varied, will be conducted. Preliminary results indicate this is an important consideration for business cycle accounting. Finally, an empirical study to determine the nature of productivity and output movements at the industry level will be undertaken. The key feature of this analysis is that human capital is in part firm specific. The question being addressed is whether procyclical productivity movements are an artifact of abstracting from this feature and not the result of exogenous technological change. This question is another important issue in business cycle accounting.
