Archive for July 26th, 2010

US House of Representatives discuss DSGE models!

July 26, 2010

I didn’t know it would go to this level but it has.

House of Representatives  Committee on Science and Technology held a hearing on Building a Science of Economics for the Real World.

Its Chairman Brad Miller says:

A few weeks after Lehman Brothers went bust, Former Fed Chairman Alan Greenspan, the steward of our economy during the 20 years that culminated in the housing bubble’s growth, told our colleagues on the House Oversight and Government Reform Committee that his reaction to the financial crisis was one of “shocked disbelief.” He had “found a flaw,” as he put it, “in the model that [he] perceived [to be] the critical functioning structure that defines how the world works.”

Greenspan’s fallen model of the market shares many assumptions with the model that’s favored today, from academe to the world’s central banks. The macroeconomic model is called the Dynamic Stochastic General Equilibrium model mercifully called DSGE for short. According to the model’s most devoted acolytes, the model’s insights rival the perfect knowledge Paul described in the First Letter to the Corinthians; but unlike the knowledge Paul described, DSGE’s insights are available in the here and now.

To be fair, DGSE and similar macroeconomic models were first conceived as theorists’ tools. But why, then, are they being relied on as the platform upon which so much practical policy advice is formulated? And what has caused them to become, and to stay, so firmly entrenched? And, finally, the most important question of all: What do we get when we apply the various tools at our disposal to the urgent economic problems we’re facing today?

If this approach to economics is useless for the purposes of advising policy makers to lead to better economic outcomes, what are we getting out of the economic research funded through the NSF?

Besides raising these questions about the dominant model, we plan to have a look at the competition. What kinds of alternative models exist, and do we need to generate still others? Should we be using a variety of models in concert rather than relying on only one type? Should the Federal government use its funding of economic science to encourage the development of these alternative approaches?

Hmmm. Who were invited for the hearing and what did they say:

We have a distinguished panel to help us delve into these issues. Dr. Robert Solow will tell us what is in the DSGE model, where it parts from the realities of the world, and what kind of advice it tends to deliver. Dr. Sidney Winter will talk about the economic realities that DSGE and its macroeconomic cousins fail to take into account and about how to look for policy advice when there are important features of the economy that don’t lend themselves to modeling. Dr. Scott Page will provide a glimpse of a new form of model that advanced computing power has made possible, the agent-based model, and make a case for the use of many and varied models.   Dr. David Colander will explain why DSGE has achieved such a monopoly and outline a plan designed to open the floor to a broader spectrum of ideas. And Dr. V.V. Chari will state that while DSGE models are definitely capable of improvement, many of the criticisms leveled against them are inaccurate and, in any case, “there is no other game in town.”

Great stuff.

I have started to read the transcripts of these economists. Looks exciting right away.

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July 26, 2010

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