"I do not think that the currently popular DSGE models pass the smell test. They take it for granted that the whole economy can be thought about as if it were a single, consistent person or dynasty carrying out a rationally designed, long-term plan, occasionally disturbed by unexpected shocks, but adapting to them in a rational, consistent way... I think this claim is generally phony... An obvious example is that the DSGE story has no real room for unemployment of the kind we see most of the time, and especially now: unemployment that is pure waste... There are other traditions with better ways to do macroeconomics."Perhaps agent-based modelling (ABM) is a path forward? At least that is what The Economist argues in this 2010 article. The article is admittedly a bit idealistic in its outlook; a limitation of ABMs is that they have a huge number of equilibria. That being said, as long as we are aware of their limitations, ABMs should be more widely adopted by macroeconomists keen on understanding how the economy functions.
Sunday, October 14, 2012
Agent-based modelling in macroeconomics
There are numerous problems with Dynamic Stochastic General Equilibrium modeling (DSGE) in macroeconomics (I realise I'm slightly out of my depth here, being an applied microeconomist). Nobel Prize winner Robert Solow once said of DSGE models,