tag:blogger.com,1999:blog-5908830827135060852.post4390120365150426932..comments2020-01-24T05:56:36.117-05:00Comments on Bond Economics: DSGE Macro As An "All You Can Eat" Buffet (Part 1)Brian Romanchukhttp://www.blogger.com/profile/02699198289421951151noreply@blogger.comBlogger6125tag:blogger.com,1999:blog-5908830827135060852.post-66274118364225463002016-01-22T12:03:30.308-05:002016-01-22T12:03:30.308-05:00I am not hugely optimistic either; you may note th...I am not hugely optimistic either; you may note the general lack of forecasts in my writing here. I do not particularly mind have relatively huge error bars on forecasts, so long as they are directionally correct. And to be honest, the huge forecast errors happen around recessions. The behaviour of the economy is in a different mode during a recession, so I think any quantitative forecasts are useless.<br /><br />I am finishing my latest round of complaints about DSGE models at the moment. I will eventually turn to the constructive question of what we can hope to do. I introduced that in this part, but I could give more details later.Brian Romanchukhttps://www.blogger.com/profile/02699198289421951151noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-44275355054699723472016-01-22T10:08:50.392-05:002016-01-22T10:08:50.392-05:00Brian-
Maybe I've become more of an economics...Brian-<br /><br />Maybe I've become more of an economics nihilist over time but my current position is that economists cant even answer this question:<br /><br />"what happens to the unemployment rate if there is fiscal stimulus which is 2% of GDP?"<br /><br />any more definitively than...."will probably go down by some amount".<br /><br />If you think climate modeling is difficult with supercomputers and 100's of equations, thats nothing to the chaos that is the global economy. THere are simply way too many assumptions in these models to be of any predictive use. Everything is contigent on ceterus paribus assumptions which never hold. <br /><br />IOW what happens to the UE rate w\ a 2% of GDP deficit increase?<br /><br />what happens to bank lending?<br />Are there changes to regulation that makes lending and speculating easier or harder?<br />Whats the distribution of the deficit increase?<br />What will happen to the savings rate?<br />Is it on spending or tax side?<br />Whats the impact on the trade balance?<br />Whats going on in EU, CHina, Canada?<br />Whats the UE trend and position prior to the fiscal adjustment? 2% deficit will probably be more impactful on UE if its at 10% than 4%<br />What time scale are we talking about? is the fiscal adjustment ongoing or just for 1 year? If its an infrastructure deficit it might take a year just to get the projects rolling. <br /><br />Etc. etc.<br /><br />Now sure you can make assumptions for every single one of these questions and run the model through a computer to get a projection. but to assume that even one of your assumptions let alone all or most of them will hold is completely misguided and naive IMHO. The other problem is that alomst every variable is a dependent variable. <br /><br />Bank Lending rates cant be judged without knowing the future regulatory framework and "animal spirits" culture. the regulatory framework cant be guessed without knowing what the political culture and the relevant elected legislator breakdown (Ds vs Rs). Are there elections coming and when? So you need to try and predict that too. Is a new fed chair going to be appointed? will they be more hawkish? Will they raise rates higher than you expect? Lower? At what pace?<br /><br />Sorry, started to go down the rabbit hole again there. Every question you ask needs to have some sort of assumption made for it either explictly or implictly. So what good are these models for answering a question like the one you asked, which is a rather simple question on the surface? Almost zero given the current state of economics knowledge, understanding, and modeling.Auburn Parkshttps://www.blogger.com/profile/15433129947896088098noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-48331653476898622822016-01-22T06:37:38.874-05:002016-01-22T06:37:38.874-05:00I'm an ex-applied mathematician, so I am fond ...I'm an ex-applied mathematician, so I am fond of those models. I realize that there's things that you cannot do with them. But I find it hard to see how to answer quantitative questions in economics - what happens to the unemployment rate if there is fiscal stimulus which is 2% of GDP? - without them. They do not have to be fancy-looking calculations; even a rule-of-thumb has an embedded model behind it.Brian Romanchukhttps://www.blogger.com/profile/02699198289421951151noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-88200694953929403782016-01-22T01:51:14.185-05:002016-01-22T01:51:14.185-05:00There's your problem. Mathematical models. Or ...There's your problem. Mathematical models. Or spreadsheets as they are otherwise known. <br /><br />I can get people inside my models without any trouble. In fact none of them would earn any money without people using them. Neil Wilsonhttps://www.blogger.com/profile/11565959939525324309noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-59286493106778151872016-01-21T07:14:24.608-05:002016-01-21T07:14:24.608-05:00Fun fact: aeronautics engineers have linear models...Fun fact: aeronautics engineers have linear models describing human behaviour. They need them in order to see if their designs might trigger PIO - pilot-induced oscillation.<br /><br />Although I recognize that we can have non-mathematical models, it's hard to get people inside mathematical ones. People refuse to become sets for some reason or another.Brian Romanchukhttps://www.blogger.com/profile/02699198289421951151noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-64038840201523626152016-01-21T02:12:01.359-05:002016-01-21T02:12:01.359-05:00"The hard to measure concept of animal spirit..."The hard to measure concept of animal spirits is what dooms the big macro models"<br /><br />The way to make your models mimic human behaviour is to invite humans into your models. Neil Wilsonhttps://www.blogger.com/profile/11565959939525324309noreply@blogger.com