tag:blogger.com,1999:blog-17232051.post1184422642525253350..comments2024-03-28T03:16:14.104-04:00Comments on Noahpinion: What can you do with a DSGE model?Noah Smithhttp://www.blogger.com/profile/09093917601641588575noreply@blogger.comBlogger65125tag:blogger.com,1999:blog-17232051.post-63202883630577226492017-01-29T06:54:22.281-05:002017-01-29T06:54:22.281-05:00I’d like to start with the falsifiability principl...I’d like to start with the falsifiability principle. We know that it’s based on the idea that given a theory (a conceptual representation of reality) it’s possible to think an experiment that could demonstrate that the same theory could be (or not) wrong. This idea is based on the following conventions:<br />a) It exists a theory that identifies the existence of a set of variables that characterize a certain system and influence each other;<br />b) Changing the state of one variable, we can forecast the change of one or more of the other variables;<br />c) It exists a conventional procedure to give measure of these variables;<br />At the end, given a certain state of the system, we will fit the actual values of the variable with these forecasted by the theory. If the model doesn’t fit reality, it’s plausible to reject the theory (it doesn’t pass the falsification process) even if we know that the philosophical debate is not so linear and subjected to criticism. In any case, this procedure is logically based on modus tollens: If A -> A v B is false (doesn’t fit “reality”) then A is false.<br />Well, now we must separate normative and positive economics. The data you showed in your post said us, beyond a reasonable doubt, that, if you base our judgment on falsifiability principle, we must reject DSGE models. If we look at positive aspects of economics (economic policy), we should judge a theory used by policy makers to take decisions looking at its real utility. A theory rejected is like a musician who play a bass without strings...Whohttps://www.blogger.com/profile/07021663012395381687noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-29979388796443772692017-01-23T05:17:03.990-05:002017-01-23T05:17:03.990-05:00You mention that DSGE models come in huge variety ...You mention that DSGE models come in huge variety which raises the question which one to use for policy advice and forecasting. The more serious question though is what does the (indiscriminate) existence of many competing models mean for each model's microfoundation (Lucas-proofness)? It simply means that an individual cannot be assumed to form its expectations only on the particular model at hand because that would be utterly irrational. It would have to consider all other (now available and all future) models instead. Therefore, Lucas-proof DSGE models (and their friends) are not Lucas-proof at all :-). See: https://www.researchgate.net/publication/308675193_Fukuyama_models_-_a_re-appraisal_of_the_Lucas_critique <br /><br />Best, <br />Christian<br />www.s-e-i.chChristian Muellerhttps://www.researchgate.net/publication/308675193_Fukuyama_models_-_a_re-appraisal_of_the_Lucas_critiquenoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-44513728709356811952013-08-07T11:46:11.798-04:002013-08-07T11:46:11.798-04:00My brother does something with business forecastin...My brother does something with <a href="http://mycompanymodel.com/" rel="nofollow">business forecasting models</a>. What exactly is that? Anonymoushttps://www.blogger.com/profile/15284769061740241391noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-21988442671478062802013-06-06T10:09:48.620-04:002013-06-06T10:09:48.620-04:00"In principle, though, there's no reason ..."In principle, though, there's no reason why they can't be useful."<br /><br />How about this principle: Any model that is successful in predicting macro economic behavior, will be useful only if it allows policy makers to change policy decisions based on the prediction. Such predictable policy changes will allow some market participants to make money by predicting the policy changes and results. The success of the successful predictors will result in so much behavior change that it invalidates the model.<br /><br />I'd say that "success leads to behavior change and then failure" of a model is the kind of principle that DOES provide a reason that such models won't be long term useful for prediction.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-3040054865998613922013-06-03T13:50:23.660-04:002013-06-03T13:50:23.660-04:00Thanks, Leigh! I'll definitely take a look. I&...Thanks, Leigh! I'll definitely take a look. I've been meaning to read a lot more about ABM.Noah Smithhttps://www.blogger.com/profile/09093917601641588575noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-34271856447407634132013-06-03T13:09:18.777-04:002013-06-03T13:09:18.777-04:00Regarding agent-based modeling (ABM)....
I, too, ...Regarding agent-based modeling (ABM)....<br /><br />I, too, am delighted to see the open and honest discussion occurring in this blog regarding the current state of macroeconomic theory, and the advantages and disadvantages of alternative modeling approaches for macroeconomics such as DSGE and agent-based modeling (ABM).<br /><br />For a comprehensive set of introductory materials on agent-based macroeconomics, agent-based finance, and agent-based computational economics (ACE) more generally, please check out the following highly active sites: <br /><br />ACE Homepage: Growing Economies from the Bottom Up<br />http://www2.econ.iastate.edu/tesfatsi/ace.htm<br /><br />Agent-Based Macroeconomics<br />http://www2.econ.iastate.edu/tesfatsi/amulmark.htm<br /><br />Agent-Based Financial Economics<br />http://www2.econ.iastate.edu/tesfatsi/afinance.htm<br /><br />ACE Introductory Materials<br />http://www2.econ.iastate.edu/tesfatsi/aintro.htm<br /><br />Many annotated pointers to additional sites are linked at the above ACE homepage, including pointers to ACE/ABM introductory slide presentations, teaching resources (ACE/ABM courses/programs), software resources (ACE/ABM computational labs, software, and toolkits), and ongoing ACE research focusing on: verification & empirical validation; agricultural & natural resources, automated markets, business and management, economic policy, electricity markets, evolution of institutions and social norms; industrial organization; labor markets; market design; network formation; organizations; parallel experiments with real and computational agents; path dependence; political economy; technological change and economic growth.<br /><br />In short, the amount of ongoing activity related to ACE is rapidly growing, and the above sites attempt to give newcomers a broad overview of this activity. I hope that the readers of this blog who are not currently familiar with this modeling approach will be interested enough to read at least some of the introductory materials at these sites. <br /><br />Constructive comments for improving the presentation of materials at these sites would be most welcome.<br /><br />Leigh Tesfatsionhttp://www.econ.iastate.edu/tesfatsi/noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-758630036612848662013-05-31T17:09:43.269-04:002013-05-31T17:09:43.269-04:00As I understand ABM, you can model emergent behavi...As I understand ABM, you can model emergent behaviors where the system behaves very differently from its parts, rather like how the behavior of molecules does not follow the same rules of behavior governing that of atoms, which is why chemistry is a separate field from physics. So that the agents behave according to mathematical rules does not mean the system has to.perfectlyGoodInkhttps://www.blogger.com/profile/03909562941005842228noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-72648978131474898372013-05-29T22:04:00.515-04:002013-05-29T22:04:00.515-04:00Yep. Though note that the equations include some d...Yep. Though note that the equations include some derivates of macro aggregates and at all time periods the accounting identities hold. <br /><br />I thought you might just get the book from the library to get a feel for why there exists this group who want to reject DSGE and use other tools. And of course, maybe outline a bit of a pros/cons list of DSGE vs monetary models vs ABM based on your reading (you seem to be able to provide good clear unbiased views on such things). <br /><br />I guess my personal view is that there won't be an approach that forecasts well. The economy is a complex system and we know that the path it takes is sensitive to initial (and all time period) conditions. Add a sprinkling of politics and you don't have much to work with!<br /><br />Cameron Murrayhttps://www.blogger.com/profile/08737859133901303110noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-30300984040709228672013-05-29T17:17:25.052-04:002013-05-29T17:17:25.052-04:00See my more recent post:
http://noahpinionblog.blo...See my more recent post:<br />http://noahpinionblog.blogspot.com/2013/05/dsge-financial-frictions-macro-that.htmlNoah Smithhttps://www.blogger.com/profile/09093917601641588575noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-44512794814681842892013-05-29T12:35:51.794-04:002013-05-29T12:35:51.794-04:00Wouldn't the 'thermostat problem' appl...Wouldn't the 'thermostat problem' apply only if the model was actually being used to adjust the economy? Barry DeCiccohttps://www.blogger.com/profile/04735814736387033844noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-21134678341585231772013-05-29T12:32:39.420-04:002013-05-29T12:32:39.420-04:00I don't understand why you say:
i) We know th...I don't understand why you say:<br /><br />i) We know the assumptions are not even closed to correctly outlining how people behave.<br />ii) Their predictive power is fairly low.<br /><br />But then you conclude "I don't know". Really? I know you're physicist, and I can't imagine you saying the same about an atomic theory such that:<br /><br />i) The theory postulates that atoms behave in certain way, we put it at test, and we found that's not the case.<br />ii) The theory predicts certain results in thermodynamics, and the correlation between prediction and reality is low.<br /><br />and that you don't know whether is true or false.<br /><br />I do understand that you're judging it as a "tool", but it's a theoretical model and if it's mostly false why should we expect it to have correct predictions?Luis Augustohttps://www.blogger.com/profile/17574787433969840143noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-19220449508134826282013-05-29T11:07:14.384-04:002013-05-29T11:07:14.384-04:00Overfitting, is my guess.
http://en.wikipedia.org...Overfitting, is my guess.<br /><br />http://en.wikipedia.org/wiki/File:Overfit.pngNoah Smithhttps://www.blogger.com/profile/09093917601641588575noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-75552820649482583082013-05-29T09:30:14.094-04:002013-05-29T09:30:14.094-04:00" I don't know too much about this, and t..." I don't know too much about this, and the name is weird, because DSGE models are also agent-based."<br /><br />Not in the computer science sense they aren't.gcallahhttps://www.blogger.com/profile/10065877215969589482noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-91957612038442312822013-05-29T09:25:06.282-04:002013-05-29T09:25:06.282-04:00Must say I am unfamiliar with Wynne Godley but as ...Must say I am unfamiliar with Wynne Godley but as for ABM, Rob Axtell's (and Joshua Epstein's) work to be the most fascinating. In particular:<br /><br />http://www.brookings.edu/ES/dynamics/papers/firms/firms.pdf<br /><br />http://www.creativeclass.com/rfcgdb/articles/Emergent_Cities.pdf<br /><br />and the seminal work <br /><br />http://www.amazon.com/Growing-Artificial-Societies-Science-Adaptive/dp/0262550253RAstudentnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-77625747883356290602013-05-29T09:17:03.549-04:002013-05-29T09:17:03.549-04:00Touche Mr Smith. Consider my mind officially blow...Touche Mr Smith. Consider my mind officially blown. In all honesty though, these results make no sense to me. I really cannot understand how its possible that an AR could out perform a VAR, BVAR, and RVAR (what they call RW). RAstudentnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-88142553436831179352013-05-29T03:18:05.301-04:002013-05-29T03:18:05.301-04:00Nick, you're aware of the fact that there are ...Nick, you're aware of the fact that there are "violations of the EMH" that have persisted for like 40 years, right? (I put in scare quotes, since they may turn out to have rational explanations.) I swear to God, I get the impression that the last paper in finance anyone in economics has read was in 1970 or so.waltnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-70384450193264328662013-05-29T03:06:48.310-04:002013-05-29T03:06:48.310-04:00I am not sure it'll be so good for their expor...I am not sure it'll be so good for their exporters: First, it relies on none of their competitors reacting. Two, what about input prices? But, yes, if someone should benefit, it should be exporters.<br /><br />I am pretty sure it will also boost their inflation (if only via higher imported prices).<br /><br />How's that going to do anything FOR AD, though, I wonder?Anonymoushttps://www.blogger.com/profile/02635749385748660522noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-79376868067775541052013-05-29T01:00:18.226-04:002013-05-29T01:00:18.226-04:00- I've looked into many examples of old style ...- I've looked into many examples of old style macro models and ABM's. The old simultaneous equations models just strike me as documenting a set of correlations that were found in the data set they used without much structure. This doesn't matter if you just want the best point forecast (though it's better than to just use a statistical model like a VAR or even univariate ARMA equations). But it does matter if the goal is to answer things like what's the effect of policy X or structural shock Y. As for ABM's I constantly get the impression that the rationality in them is much too bounded indeed in terms of reflecting motivations for human actions, and the market processes they model also strike me as too primitive. I appreciate the value in trying to build things from the bottom up, but I feel you may end up with models describing a market process from hundreds of years ago instead of the sophisticated markets of the 21st century. There's probably a middle way where ABM's contain more dynamic behaviour considerations and use more sophisticated matching and search protocols. I can see how such a hybrid would be both micro founded and contain more realistic heterogeneity than most DSGE models. But I don't see anyone working on this from the ABM papers I've seen, and a model with millions of agent types is bound to offer more complicated and hard to understand insights than a DSGE model with 2-4 agent types.<br />- RBC models have been abandoned in the central bank monetary policy community. They're still used a lot in economic growth,development and taxation analysis. If it seems they must be trivially wrong because the real world has nominal prices that don't move all the time, you should look up the Barro critique. The basic intuition is that sticky prices don't necessarily have a big macroeconomic effect if they're attached to sticky quantities (and when quantities move prices are flexible). As for the comparison of fit: sticky price and wage models have more complicated equations with dubious assumptions about the frequency of wage adjustment. RBC models have fewer equations,so if you want better forecsting performance it's easier to specify them with more complicated (realistic?) shock processes to improve fit. It's not always clear which route is more realistic. But it's impossible to discuss this seriously in blog comments... <br />- danielshttps://www.blogger.com/profile/01799942447501959179noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-44685718568839354392013-05-28T22:16:39.380-04:002013-05-28T22:16:39.380-04:00http://press.princeton.edu/titles/9217.html
When ...http://press.princeton.edu/titles/9217.html<br /><br />When Shimer says "neoclassical growth model" he means "RBC".Noah Smithhttps://www.blogger.com/profile/09093917601641588575noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-51130435784070208522013-05-28T22:10:45.408-04:002013-05-28T22:10:45.408-04:00So, are you talking about this kind of model?
http...So, are you talking about this kind of model?<br />http://www.levyinstitute.org/pubs/wp_494.pdf<br /><br />This is just a system of linear equations for macro aggregates, with the coefficients assumed to be structural parameters.Noah Smithhttps://www.blogger.com/profile/09093917601641588575noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-29407305764655593802013-05-28T22:04:59.440-04:002013-05-28T22:04:59.440-04:00In recent times, of course, RBC models themselves ...<i>In recent times, of course, RBC models themselves have fallen out of favor somewhat in the mainstream business-cycle-modeling community, and have gone on to colonize other fields like asset pricing, international finance, and labor econ</i><br /><br />Can you point me to some of the examples in labor? I have an idea I want to explore and it would be useful for me to have some idea of what's gone before.<br /><br />Thanksmarcelhttps://www.blogger.com/profile/08831521008587576816noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-6398588908538035402013-05-28T22:04:48.187-04:002013-05-28T22:04:48.187-04:00Actually, I know a bit about agent-based models in...Actually, I know a bit about agent-based models in finance...not in macroeconomics (remember, I'm a finance prof, I just took macro in grad school). There are a LOT of different things that agent-based macro models could be doing. I can think of a lot of these things. But I don't know which ones people are actually doing. However, the word on the street is that ABM is getting more and more attention. So I'll look into it at some point.<br /><br />As for Wynne Godley and his approach, I'm not going to order a book before reading some free PDFs...got any good links?<br /><br />I agree that the macro profession is way, way, way too concentrated on the DSGE approach. Noah Smithhttps://www.blogger.com/profile/09093917601641588575noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-64213109047977256062013-05-28T20:19:34.227-04:002013-05-28T20:19:34.227-04:00Mate, I love that you are an honest outlet for how...Mate, I love that you are an honest outlet for how economists reason and model the economy. But it is a very poor sign about the state of the discipline that you, a freshly minted star PhD, knows all these limitations to the main modelling techniques (since you are obviously well trained in them) yet are basically ignorant of other approaches that seem to offer quite useful insights. <br /><br />I am not accusing you of bias. You clearly think things through very clearly and are honest about what economists are up to. But it seems like economists in general won't try anything else except tweaking their current tool till it works a little better.<br /><br />I guess my analogy is that economists are trained in using a hammer to work on a problem. The hammer doesn't seem to work, but they won't even try a spanner or a screwdriver. They must modify the hammer until it works a tiny bit better. Meanwhile a whole field of people is out there testing other tools and getting really interesting results. <br /><br />From your writing it seems you are well aware of this. For example you refer to agent based models, but don't really know enough to say whether they might be useful. Then a commenter asked about Wynne Godley, and again you haven't had much exposure to this approach.<br /><br />If you are interested in learning about Wynne Godley's approach, his toolbox if you will, I recommend this book<br />http://www.amazon.com/Monetary-Economics-Integrated-Approach-Production/dp/0230301843<br /><br />I am also studying an economic PhD and find the rather inward looking nature of the field quite disturbing. Especially when it comes to macro (there are many microeconomists happy to learn from psychology, sociology etc).<br /><br />In any case, when you do read up on some alternative macro approaches I would really like to read your opinion (in my view many have similar problems, some have different problems). <br />Cameron Murrayhttps://www.blogger.com/profile/08737859133901303110noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-66727720388610140742013-05-28T18:34:53.131-04:002013-05-28T18:34:53.131-04:00- point forecast accuracy is far from everything e...- point forecast accuracy is far from everything even in forecasting. For decision making it may be important to accurately characterise probability of various intervals or more generally multivariate regions for the variables we care about. The best model for that purpose may tell you there's a lot of unpredictable stuff going given the small number of observable variables you have. But it may be better at quantifying the uncertainty you face than a model that tries to maximise the accuracy of the point forecast at the cost of distorting probability bands.<br />- Old style large macro models (what you call spreadsheet models) have tons of hidden assumptions hidden in all the zero coefficient restrictions they impose in their behavioural equations. They're just hidden and harder to uncover. And to boot, it's not even clear they respect the resource constraints and budget constraints of anyone in the economy. <br />- Many of the assumptions you mention are approximations of the kind you make in any econometric specification (e.g loglinearity or constant elasticity of substitution, ignoring distributional effects , the monopolistic competition assumption that prices are independent of the number of competitors in the market etc...). We couldn't possibly ever build a model as a simplifying framework for organising our thoughts in such a messy reality if we didn't have to make these assumptions. As we get better, we build more complex models with more realistic assumptions (e.g heterogeneous households and firms, more realistic wage bargaining etc...)<br />- If you end up seriously working with DSGE models and see many models you start to get a feel for which model is appropriate in which situation, and how to mentally combine different models each of which may be missing important bits of reality to get a more comprehensive understanding of the economy (but isn't this the same with micro models?). You don't this just from the core macro sequence or ocasionally reading about them.<br />- There are ways to classify different clusters of models into a smaller number of more general types (e.g models of firm level credit constraints often map into models of investment taxes/wedges, other models are basicaly about taxes/wedges on employment, others microfound changes in total factor productivity etc...). Some people at the BoE should have a lot of interesting stuff to say about this. Look up business cycle accounting and an extension by Richard Harrison and co...also the BoE's new forecast methodology combining a core DSGE model with a suite of other models (DSGE or otherwise) is well documented in a recent working paper on their website.<br />- To say DSGE models are not useful in policy analysis begs the question: not useful in comparison to what? Most of the criticisms that have been made could be made just as well about the large scale macro models that are supposed to be useful in policy analysis by practioners. Lucas and Sargent made some good points in the 1970's. Looking at the current specification of e.g the Moody's macro model or the Oxford models most of these points have not been addressed. <br />- A significant component of a model becoming useful for policy analysis is experience in using it. There's a reluctance I think on the part of people trained in the old style macroeconomics to switch from simultaneous equations systems (often estimated by OLS despite the endogeneity bias) to the more modern state space/latent variables perspective that underlies the DSGE approach. As more central banks and other agencies like the European Comission work with DSGE models, they should become better at communicating their insights and using the extra structure that allows you to see people, firms and markets in these models (as you said, they're in that sense similar to agent base models) to satisfy your objective 2),3) and 4) better.danielshttps://www.blogger.com/profile/01799942447501959179noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-25895821765747594382013-05-28T18:09:15.953-04:002013-05-28T18:09:15.953-04:00It's not a good sign that I've never heard...<i>It's not a good sign that I've never heard a DSGE model mentioned in policy debates, even amoung highly technically skilled economists.</i><br /><br />Agreed.<br /><br /><i>As to forecasting, nothing can beat a futures market.</i><br /><br />Not necessarily true, since the Fed has inside info (note that according to Edge and Gurkaynak, the Fed's short-term inflation forecasts are MUCH better than any model's, and in fact have an R-squared of 0.48, which is huge).Noah Smithhttps://www.blogger.com/profile/09093917601641588575noreply@blogger.com