Economic Policy and the Need for Humility

Nice and much needed speech by Yves Mersch of ECB:

If it did nothing else, the financial crisis served to remind us all of a few home truths. The economy is a profoundly complex setting. It is bound and shaped by history as well as by cultural and legal norms. If it can at all be conceived of as a model, such a model would have many moving parts and shifting parameters and volatilities. But even then, deep uncertainty inevitably remains – uncertainty about the underlying mechanisms and parameters and the lines of causality between those mechanisms. Many economists had in recent years perhaps forgotten that, but as I have argued the study of economics and many practitioners had not.

Let me be clear, an acknowledgement of uncertainty is not a recipe for nihilism. On the contrary, the ECB has shown great flexibility and ingenuity in dealing with the financial crisis. For instance, all the available evidence suggests that the range of asset purchases programme has led to material improvements in financial conditions and credit supply conditions in the euro area. The ECB has marshalled its many models and staff expertise to great effect in these last few admittedly difficult years.

Moreover, economists have made a sober assessment of the gaps in their modelling frameworks and made a serious, diligent, and ongoing attempt to fill them whilst retaining model tractability. In this cause we have and will be guided by the proliferation of large and detailed datasets in our macroeconomic and macro-prudential settings. And yet the benefit of experience, judgement, and – perhaps above all — humility remains always to the fore.

Applies to economic profession in general. The sheer arrogance and hubris has made things even worse.

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