A Simple Economic Model with Interactions

Abstract

Macroeconomic models rarely make explicit how agents actually interact. If however interaction is explicitly specified, the link between the micro and macro properties of models becomes much richer, leading in certain cases to the onset of macro-level instability. This working paper incorporates interactions among agents at a micro level into the basic Solow model to study disequilibrium behaviors and economic instability on a macro level. In particular, we investigate two limiting cases. First, we recover the classic case where the economy converges to the balanced growth path and then grows along it. In the second case, where the interactions-fueled demand dynamics become the main force driving the economy, we obtain business cycles as quasiperiodic endogenous fluctuations.