Consumers’s confidence in a business cycle model:an agent-based approach

Abstract

The importance of confidence was already emphasized by Keynes (1936), who used it to support his reasoning on the potential of possible fiscal policies to stimulate aggregate demand during the times of weak economic performance. The influence of confidence on economic activity was later confirmed in~many empirical studies (Mueller, 1966, Ludvigson, 2004, etc.). The main goal of this dissertation thesis is to find out, whether the impact of the economic confidence on economic activity could be even larger, if the spread of waves of optimism and pessimism in~society could not only influence the economic activity but also cause its cyclical movement.

Similar idea was already presented by Westerhoff (2010) and we are partially continuing in his work. In~the model of Westerhoff (2010) the confidence is related to production units. Each production unit is, on the base of its confidence, forming its expectations about the aggregate demand and according to these expectations they determine its production. Westerhoff (2010) proved that the spread of the waves of optimism and pessimism, among production units, can generate the cyclical movement of economic activity.

In the dissertation thesis, we are considering the role of confidence from the side of a consumer. The confidence is connected here with the formation of consumption spending and determines the aggregate demand. The concrete goal of the thesis is to find out, whether the spread of waves of optimism and pessimism among consumers could lead to a cyclical movement of economic activity.

The research is undertaken using agent-based modelling. Within the thesis, we have constructed a simple agent-based model with a lattice of agents - consumers, on which a spread of confidence is simulated. Besides the lattice, there is one production unit - firm in the model. The model is focused on the development of an aggregate demand and an aggregate supply to monitor the influence of confidence. There is no monetary authority and the prices are assumed to be constant. The influence of the spread of the consumers' confidence was further assessed on more complex model. This model is an extension of the baseline model for a heterogeneous labor market. The goal of this extension is to consider the influence of an unemployment rate on the consumer confidence. Simulations from both models confirmed that the spread of waves of optimism and pessimism can really generate the cyclical movement of economic activity.