On the sources of economic growth, structural consistency of agent-based models and mental-accounting consumer behaviour

Abstract

An assessment of the sources of growth in agent- and general equilibrium-based models is presented, along a discussion of the strengths and weaknesses of existing approaches to growth modelling. The empirical and theoretical pitfalls of assuming wage-led growth or relying on meta-time market clearing assumptions are underlined. To address these issues, a mental-accounting consumer demand framework is developed, and a method of evaluating macroeconomic structural consistency of agent-based models is devised. It is claimed that structurally consistent agent-based models are as close counterparts of dynamic stochastic general equilibrium models as possible without compromising the assumption of no wage-led growth and while rejecting the meta-time simplification. Using three sectoral agent-based models, it was demonstrated that the variability of spending rates and including two final good sectors guarantee sustainability of growth, albeit at very weak rates due to structural consistency. Furthermore, it was found that including at least two final goods sectors is necessary for preventing collapse and ensuring realistic growth rates in agent-based models in which wage-led growth is forbidden. The main contribution of this paper is identifying the space for demand expansion and the structural inconsistency between demand, incomes, production, and firms’ internal-division-of-funds structures, as the major sources of economic growth.