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Abstract

As a first step towards extending the MADIAM model reported previously to a model hierarchy MADIAMS (Multi-Actor Dynamic Integrated Assessment Model System), we upgrade the basic economic model M2 of the three model levels M1-M3 of MADIAMS to include non-equilibrium processes. The evolution of the economy is governed by the interactions of a few key aggregated actors (a firm, household, a government and a bank). The economy is treated as a nonlinear system described by a set of system-dynamic equations closed by the specification of the actors' control strategies. The model provides a unified framework for studying the dependence of economic growth and transformation on negotiated wage levels, the rate of investment in human capital (technological innovation), consumption versus savings preferences, government policies and various " animal spirit" processes. The latter are " not the outcome of a weighted average of quantitative benefits" (Keynes) and include unstable feedback responses of firms, consumers and investors to changing supply, demand and price signals, leading to business cycles and speculative boom-and-bust events. The inclusion of these dynamic feedback processes in coupled climate-socio-economic models is important for a realistic assessment of the multi-time-scale impact of climate policies. © 2012 Elsevier Ltd.