IIT Madras is a public technical and research university located in Chennai, Tamil Nadu. Founded in 1959, it is recognised as an Institute of National Importance.

IIT Madras has been ranked as the top engineering institute in India for four years in a row by the National Institutional Ranking Framework of the MHRD

It currently offers undergraduate, postgraduate and research degrees across 16 disciplines in Engineering, Sciences, Humanities and Management. About 596 faculty belonging to science and engineering departments and centres of the Institute are engaged in teaching, research and industrial consultancy.

IIT Madras

We develop a tractable model of price dynamics in a general equilibrium economy with cash-in-advance constraints. The dynamics emerge from local interactions between firms that are governed by the production network underlying the economy. We analytically characterise the influence of network structure on the propagation of monetary shocks. In the long run, the model converges to general equilibrium and the quantity theory of money holds. In the short run, monetary shocks propagate upstream via nominal changes in demand and downstream via real changes in supply. Lags in the evolution of supply and demand at the micro level can give rise to arbitrary dynamics of the distribution of prices. Our model provides an explanation of the price puzzle: a temporary rise in the price level in response to monetary contractions. In our setting, the puzzle emerges under two assumptions about downstream firms: they are disproportionally affected by monetary contractions and they account for a sufficiently small share of the wage bill. Empirical evidence supports the two assumptions for the US economy. Our model calibrated to the US economy using a data set of more than fifty thousand firms generates the empirically observed magnitude of the price level rise after monetary contractions. © 2021 Elsevier B.V.

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Journal of Economic Dynamics and Control

Monetary dynamics in a network economy

Most business cycle theories originate from a paradigmatic vision with a two fold simplicity. The first of which is that firms are bound through simple relations in which they influence each other anonymously via prices but not directly through non-price rivalrous competition. And the second is that firms have immutable and transparent cores. These presumptions yield an economy whose natural state is one of stability. Macroeconomic dynamics, or change more generally, is brought about by exogenous shocks. This paper develops an alternate vision for understanding business cycle dynamics. We consider the dynamics that emerge from micro changes that originate from deep within firms. Each firm is surprised by externally visible innovations of other firms because they cannot observe each others’ high dimensional interiors. Innovations can cascade because of the complex microeconomic interrelations between the plans of firms. The interaction between external-observable attributes and internal-unobservable active cores of firms is capable of generating change without exogenous shocks. © 2021, The Author(s), under exclusive licence to Springer Science+Business Media, LLC part of Springer Nature.

Department of Mechanical Engineering

Review of Austrian Economics

Business cycles and the internal dynamics of firms

Empirical evidence shows monetary shocks have two temporary effects on the distribution of prices. One, the dispersion of cross-section of prices increases in response to monetary shocks. Two, some prices change in the ‘wrong’ direction: some prices decrease in response to positive monetary shocks, and increase in response to negative monetary shocks. We present a model that generates the two effects of monetary shocks on the distribution of prices as an out-of-equilibrium phenomena. Firms are related to each other through a production network. Monetary shocks change the working capital of a subset of firms and percolate to other firms through buyer-seller linkages. Price dispersion increases because the percolation of a monetary shock through the production network causes prices to differentially deviate from their steady state values. Some prices change in the wrong direction because a shift in one firm’s demand causes a shift in another firm’s supply (and vice-versa), thereby generating complicated chains of bi-directional price changes. Monetary shocks can significantly disturb relative prices even when all prices are fully flexible.

Journal of Economic Behavior & Organization

The price effects of monetary shocks in a network economy

This paper argues that NGDP targeting is unlikely to produce macroeconomic stability. Contrary to the policy objective, NGDP targeting may increase macroeconomic turbulence. DSGE models that prove the effectiveness of NGDP stabilization policy rest on two assumptions. The first assumption is that macroeconomic volatility is a consequence of exogenous shocks to an otherwise stable system. The second assumption is that central banks can act upon aggregate variables. Neither of these assumptions is accurate. An economy is an ecology of interacting agents, some of whom have rivalrous plans. Macroeconomic volatility is an endogenous and intrinsic feature of such an economic system. Furthermore, central banks act upon some agents in the economic system, not on aggregate variables. The percolation of central bank actions through production networks can impede coordination efforts of economic agents during recessions, thereby increasing macroeconomic volatility. © 2017 Board of Trustees of the University of Illinois

Quarterly Review of Economics and Finance

Nominal GDP stabilization: Chasing a mirage

The traditional mechanism of finding Nash equilibria presumes economic actors are capable of performing computations that even computers would take far too long to complete. A decentralized and parallel process of interactions between simple economic actors is presented as a more plausible microfoundation of the concept of Nash equilibria. It is found that agent interactions on a scale-free network converge to an equilibrium within reasonable time. NP computational complexity of Nash equilibria does not diminish its empirical relevance.

Eastern Economic Journal

The Complexity of Coordination

We study a simple coordination problem to understand the difference between centralized and decentralized economic systems. The decentralized system is more robust than the centralized system to communication errors. But the centralized system takes less time than the decentralized system to create coordination among constituent parts. Decentralization is preferable when the constituent parts are more likely to make communication errors, when there is little urgency, and when there is need to prevent system-collapse.

International Journal of Microsimulation

Coordination in centralized and decentralized systems

Extended liability for bank shareholders offers a possible method for mitigating moral hazard in insured banks. The dominant approach to maintaining financial stability seeks to constrain banks’ profit-maximizing responses to distorted incentives by means of ad hoc restrictions. By contrast, extended liability seeks to create healthier incentives. We examine how a variety of extended liability regimes worked historically, and consider leading concerns about their potential disadvantages. We conclude by discussing how extended liability avoids the difficulties of both ‘microprudential and ‘macroprudential’ approaches to systemic stability.

The Quarterly Review of Economics and Finance

Extended shareholder liability as a means to constrain moral hazard in insured banks

Using agent-based modeling, we generalize Hotelling's model of spatial competition with more than two firms in a two-dimensional space. Firms choose both price and location to maximize profits. The principle of minimum diffferentiation does not hold in general. Local duopolies emerge from the interaction between firms. Firms do not spread uniformly across the two-dimensional space, nor do they all charge the same price. Firms in more competitive locations charge lower prices and generate less profit.

Spatial competition with interacting agents

Austrian macroeconomists of the interwar period saw the economy as a complex adaptive system, in which macroeconomic variables emerge from the interaction between millions of purposefully acting agents. Recent advances in computation technology allow us to build empirically salient synthetic economies in silico, and thereby formalize many Austrian insights. We present a workhorse model with firms on an input-output network. Macroeconomic variables evolve through the interaction between micro-economic decisions. We use the model to explain an effect of monetary shocks on the price distribution and provide a sketch of other potential applications. © 2016, Springer Science+Business Media New York.

Towards a New Austrian Macroeconomics

In Capital in the Twenty-First Century, Thomas Piketty argues that capitalism can generate arbitrary and unsustainable levels of inequality. He proposes a host of measures to alter the institutions of capitalism to create a more just social order. Piketty’s analytical framework, however, assumes away the reasons for the very existence of the institutions he intends to modify. In addition, Piketty treats capital as a homogeneous entity. In the real world, there is no such thing as “capital” apart from the concrete and specific forms it takes. Capital has both a time structure and a goods structure, with varying degrees of specificity within those structures. The price system, along with other institutions, coordinates the capital structure of an economy. Without heterogeneity of capital, there are no coordination problems, and without coordination problems, there is no need for the institutions of capitalism. In this sense, Capital in the Twenty-First Century is prescription without diagnosis. © 2016, Fayetteville State University. All rights reserved.

Journal of Private Enterprise

The mythology of capital in the twenty-first century

This paper studies the problem of accumulating heterogeneous capital goods in an economy with imperfect markets populated by boundedly rational agents. It relaxes classical assumptions about information and cognition. The agents are not capable of computing an equilibrium path to steady state. Agents discover prices by interacting with each other. The economy accumulates a near-optimal mix of capital goods. The structure of interactions between agents filters their behavior in such a way that limited rationality at the micro-level does not translate to grossly inefficient outcomes at the macro-level. © 2016 World Scientific Publishing Company.

New Mathematics and Natural Computation

Out-of-Equilibrium Dynamics with Heterogeneous Capital Goods

In Creating a Learning Society, Joseph Stiglitz and Bruce Greenwald examine the role of knowledge in economic growth. They view economic growth as an impersonal and automatic phenomenon. The history of economic growth, however, suggests that it is a creative and personal process. We argue that the analytical framework deployed by Stiglitz and Greenwald is unsuited to study the creation of new products, new ways of doing things, and the discovery of new markets. While the questions Stigltiz and Greenwald ask are of fundamental importance, their analysis is neutered by the inability of their conceptual toolbox to grapple with creativity and novelty. © 2015, Springer Science+Business Media New York.

Learning as an emergent, creative process: A review essay on Joseph E. Stiglitz and Bruce C. Greenwald’s Creating a Learning Society

The basic economic problem is how to allocate resources in a system where information about preferences, endowments and production possibilities is dispersed among the many (Hayek 1945; Hurwicz 1973). In some areas of economic activity resource allocation happens through the “invisible hand” of markets, while in other areas one sees the visible hands of managers. What accounts for the difference in economic organization? In a system with dispersed information, the problem of efficient allocation of resources is essentially a problem of communication. And communication involves noise. Firms take less time than markets to communicate information, but markets are more robust to noise. In so far as the degree of noise and value of speed vary across economic activities, so will the optimal form of economic organization.

Advances in Artificial Economics

Why Do Firms Exist?

Standard macro theories have the same analytical structure as their micro counterparts. Where micro theories work with equilibrium between supply and demand for particular products, macro theories work with equilibrium applied to aggregates of products. This common approach treats the micro-macro relationship as scalable, with macro variables being aggregations over micro variables. In contrast, we pursue a systems-theoretic approach to the micro-macro relationship. This relationship is not scalable and rather entails a disjunction between micro and macro-levels of theory. While micro phenomena are still susceptible to choice-theoretic analysis, macro phenomena are products of ecological interaction and so entail emergent phenomena. Our alternative approach treats macro theory as a form of systems theory where the behavior of the system has properties that are not reducible to properties of the individual elements within that system. Besides sketching this alternative approach, we examine some of the different insights this approach offers into such topics as unemployment and stabilization. Copyright © 2015 by Emerald Group Publishing Limited.

Advances in Austrian Economics

Treating macro theory as systems theory: How might IT matter?

Sunstein and Thaler's proposal for 'libertarian paternalism' in their paper titled "Libertarian Paternalism is not an Oxymoron" (LPNO from here on) is based on the contention that paternalism is sometimes (1) inevitable and (2) non coercive, and (3) that individuals do not always make 'rational' decisions. The first two contentions are untrue, and the question of whether individuals make 'rational' decisions as judged by the axiomatic definition of neo-classical economic theory is vestigial to the ideas and policy prescriptions of classical liberal and libertarian political economy. The paper, fraught with definitional confusions and methodological difficulties, is a superior example of how correct empirical observations and laudable advancements in identifying cognitive characteristics that may be relevant to economic analysis can lead to unsound theories due to methodological deficiencies. Policy prescriptions in the long run must take an institutional form; the greatest deception of the paper lies in its omission of any discussion on such an institution, which, I believe by logical necessity would be a Platonist autocratic bureaucracy. A consistent application of libertarian paternalism is the 'road to serfdom'. © 2010 Springer Science+Business Media, LLC.

European Journal of Law and Economics

Libertarian paternalism is an oxymoron: An essay in defence of liberty

Law and economics is going through a paradigm shift as the influential behavioral school is challenging and remolding its very foundation, i.e., homoeconomicus model. However, neither of the approaches captures the essence of interaction between entrepreneurial heterogeneous agents. The Misesian homoagens approach adequately addresses the deficiencies of the predominant paradigm, opening doors to a far richer legal-economic analysis incorporating real world dynamics of complex market processes.