Research
Research
In this paper, we consider the role expectations play in the spatial diffusion of monetary shocks through a network economy. Using an overlapping generations network model, we show that changing the assumption of expectations from rational to adaptive, flips the economic response to a monetary expansion. Additionally, network structure is shown to affect the relationship between convergence and spatial central- ity. The heterogeneous agent case is considered, and the economic response is shown to depend crucially on the spatial organization of agents, leading to varying short and medium-run effects. These results are compared to data from the European Union, using the European Commission Survey of Expectations to categorize countries as forward or backward-looking with a Bayesian Model Averaging method. A Network Informed Structural VAR (NISVAR) model demonstrates the EU’s varying responses to country-specific monetary expansions. We find supportive evidence for the theo- retical model’s results: monetary expansions have a lesser effect on inflation and a comparable effect on output when directed at areas that employ backward-looking expectations compared to areas using forward-looking expectations.
While economists and the public commonly refer to economies as networks, integrating this concept into mathematical economic models is rare. This paper lays the groundwork for a new class of economic model that utilizes static networks to simulate the sharing of information. Amending a simple cobweb model to account for the information network, we show how variations of networks—and information at large—relate to economic conditions in an adaptive learning setting. Overall, we show that as networks become more interconnected, economic volatility decreases and the speed of convergence to equilibrium increases. These results provide further evidence for the importance of information availability in economic dynamics.