tag:blogger.com,1999:blog-17232051.post5474952814894460943..comments2024-03-18T22:32:52.802-04:00Comments on Noahpinion: The swamps of DSGE despairNoah Smithhttp://www.blogger.com/profile/09093917601641588575noreply@blogger.comBlogger106125tag:blogger.com,1999:blog-17232051.post-62504343550969281972014-06-10T21:40:15.007-04:002014-06-10T21:40:15.007-04:00"Chaos pretty much ensures you don't have..."Chaos pretty much ensures you don't have forecasting power."<br /><br />I like the weather forecasting analogy. If you look at it closely, though, you see that weather forecasters need a huge amount of near-real-time data in order to predict the weather just a few days in advance. Even when they've got that, predicting exactly where a hurricane is going to go or where a tornado is going to appear remains out of reach.<br /><br />You might be able to accomplish something similar in economics if you could point the firehose of data from daily Visa transactions, Walmart sales, and illegal drug purchases at a high performance compute cluster; as it stands, though, government statistical services are still trying to figure out what happened in the economy - not why it happened, but ~what~ happened - a couple of years ago, putting out regular corrections to the data they gathered then.<br /><br />When you get that daily data, though, don't expect to be able to do much better than the weather forecasters. Weather is a chaotic system; so is the economy, probably. That's why forecasting is hard. But if it's chaotic, that's what it is, right? No need to be wedded to clean predictive models if they don't and can't work.<br /><br />Andrew Klaassennoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-75962536003495785462013-04-23T06:33:00.451-04:002013-04-23T06:33:00.451-04:00Good critique of the limits of linearity in creati...Good critique of the limits of linearity in creating economic models, Noah Smith.<br /><br />But what sort of microfoundations do you hope to see built in the dynamic models of the future? Ones based on Maxmin Expected Utility, or Choquet integrals, or the decision rule Daniel Ellsberg proposed in his doctoral dissertation, <i>Risk, Ambiguity and Decision</i>?Blue Aurorahttps://www.blogger.com/profile/02044362251868221897noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-12881000377964960362013-04-08T13:55:30.376-04:002013-04-08T13:55:30.376-04:00Agree with Eric.
Anyway, what's with the hang...Agree with Eric.<br /><br />Anyway, what's with the hangup on "NECESSARY AND SUFFICIENT"? Physics envy? Math envy? Maybe it's because I was an options trader, but my take is that almost everything in economics that is nontrivial (and life, the universe, etc.) is a distribution of probabilities (and correlations, and higher-order terms). Virtually nothing is either necessary OR sufficient.Dohsanhttps://www.blogger.com/profile/07884148005077602324noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-29283931446375131202013-04-08T11:49:25.095-04:002013-04-08T11:49:25.095-04:00Biggest difference between weather forecast and ec...<i>Biggest difference between weather forecast and economic forecast (whether using DSGE or not) is economic forecast can and will influence future economic outcomes, i.e. altering probability of the next economic crisis or boom.</i><br /><br />I'm pretty sure this is wrong...forecasting methods that make good out-of-sample forecasts have implicitly taken their own existence and use into account, otherwise their out-of-sample performance would be terrible.<br /><br /><i>Models have pros and cons. Bashing one or the other endlessly doesn't help economics as the whole, especially when professors disagree and show it off publicly in an uncompromising way.</i><br /><br />This seems to me to run counter to centuries of academic tradition. It's not the way biology works, or physics, or psychology. You test other people's models to failure by being critical of them. Peer review is an institutionalized form of this, as are conferences and seminars, but informal bashing has always been part of the process. Look at Bohr and Einstein, for example.<br /><br />You want to turn econ into a cozy cartel where nobody ever has to be wrong, and we just publish our buddies' papers, and cooperate in telling the outside world that all of us are worth our salaries and they should hire more and more of us and pay us more and more? Sounds like fun, but doesn't sound like science...more like parasitism.<br /><br /><i>If anyone can tell the economic future like palm reading, that will be the end of economics.</i><br /><br />NoNoah Smithhttps://www.blogger.com/profile/09093917601641588575noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-43999633983620628462013-04-08T11:24:47.362-04:002013-04-08T11:24:47.362-04:00Biggest difference between weather forecast and ec...Biggest difference between weather forecast and economic forecast (whether using DSGE or not) is economic forecast can and will influence future economic outcomes, i.e. altering probability of the next economic crisis or boom. On the other hand, weather forecast, which is equally complex given Mother Nature's hot temper, seems to have very little impact on the likelihood of the next nature disasters. Well, maybe in 1000 years once human takes their own climate change forecast seriously enough.<br />Models have pros and cons. Bashing one or the other endlessly doesn't help economics as the whole, especially when professors disagree and show it off publicly in an uncompromising way. Linearization will give way to nonlinearity solution. Local maximization will be improved when global solution become more readily available with the new computing power. Economics will move forward with certain degrees of collaboration.<br />We are in a profession where our subject of study, the economy, won't stop evolving or can be isolated in a lab-style physics study. If anyone can tell the economic future like palm reading, that will be the end of economics.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-47192519602442472002013-04-02T15:19:49.009-04:002013-04-02T15:19:49.009-04:00I will copy and paste Cosma Shalizi comparing old ...I will copy and paste Cosma Shalizi comparing old textbooks on (condensed matter) Physics and Macroeconomics:<br /><br />More relics from graduate school, revisited as part of the book purge. These books are now 15--20 years old; I'm sure that there're more up-to-date treatments of both topics, though I feel like I'd know if something had displaced Chaikin and Lubensky form its niche, and I don't.<br />Blanchard and Fischer is about "modern" macro, models based on agents who know what the economy is like optimizing over time, possibly under some limits. This is the DSGE style of macro. which has lately come into so much discredit — thoroughly deserved discredit. Chaikin and Lubensky is about modern condensed matter physics, especially soft condensed matter, based on principles of symmetry-breaking and phase transitions. Both books are about building stylized theoretical models and solving them to see what follows from the model assumptions; implicitly they are also about the considerations which go into building models in their respective domains.<br />What is very striking, looking at them side by side, is that while these are both books about mathematical modeling, Chaikin and Lubensky presents empirical data, compares theoretical predictions to experimental results, and goes into some detail into the considerations which lead to this sort of model for nematic liquid crystals, or that model for magnetism. There is absolutely nothing like this in Blanchard and Fischer — no data at all, no comparison of models to reality, no evidence of any kind supporting any of the models. There is not even an attempt, that I can find, to assess different macroeconomic models, by comparing their qualitative predictions to each other and to historical reality. I presume that Blanchard and Fischer, as individual scholars, are not quite so indifferent to reality, but their pedagogy is.<br />I will leave readers to draw their own morals.Manoelhttps://www.blogger.com/profile/07125980057827981457noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-42846945233954831402013-04-02T14:10:39.671-04:002013-04-02T14:10:39.671-04:00Danged NIST messes up another perfectly, almost, a...Danged NIST messes up another perfectly, almost, anyways, rational explanation. MJFAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-5647625162021176492013-04-01T23:19:54.938-04:002013-04-01T23:19:54.938-04:00Can you suggest a doctor who will predict the NECE...<i>Can you suggest a doctor who will predict the NECESSARY AND SUFFICIENT conditions for a heart attack?</i><br /><br />Of course not, because there are no necessary conditions, nor sufficient ones. But they can still tell you that you should exercise more and lower the cholesterol in your diet to reduce your risk of a heart attack. Predicting when exactly a financial crisis will occur is impossible, but there are still risk factors and economics should at least strive to identify them.Eric Lhttps://www.blogger.com/profile/17688525347746547529noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-21001792684439202152013-04-01T22:47:59.735-04:002013-04-01T22:47:59.735-04:00Really excellent discussion. One of the main reaso...Really excellent discussion. One of the main reasons physicists and engineers and economists eschew nonlinear solutions is that "funky stuff happens," i.e., bizarre behavior pops out that extremely path-dependent and highly dependent on initial conditions. This makes nonlinear solutions non-generalizable, and physicists and engineers and economists typically want generalized solutions that apply widely to a vast range of initial conditions.<br /><br />That's understandable. The problem? Evidence appears to be mounting that the real world is highly nonlinear outside a relatively narrow range of boundary conditions. One example is the thyristor, best modeled as a cubic parabola Shockley curve of current vs voltage. When the voltage rises beyond a certain point you get reduced current out, but if the voltage rises high enough you suddenly get a lot more current out. This models pretty well the behavior of bandgap materials like silicon carbide that actually become highly conductive when subjected to strong voltage spikes. (It's how the surge suppressor in your power strip work. A big voltage spike makes the SiC conductive and dumps the surge current to ground.) Or again, consider the behavior of brain receptors for neurostransmitters: current neuroscience that an increase up to a certain level of a certain type of neurotransmitter produces excitatory response by the receptors, but increasing the neutrotransmitter levels beyond that point generate inhibitory response. <br /><br />We see this kind of nonlinearity most spectacularly in the breakdown of game "theory" (so-called) during the initial tests with RAND corporation secretaries in the 1950s. When the secretaries failed to behave as predicted in the game "theory" and the expected Nash equilibrium failed to materialize, the RAND economists merely dismissed the behavior of real people in the real world with hand-waving and doubletalk (i.e., the RAND scientists claimed that the behavior of real people would be different "if the rewards were larger" -- without providing a scintilla of evidence to support that baseless speculation). When game "theory" goes out the window and gets revealed as pseudoscience, the basic assumptions about investors acting as rational agents to optimize their utility function breaks down. This leads to chaotic bizarre behavior in capital markets under extreme conditions as investors eagerly take irrational moderate present losses in order to avoid expected large future losses. Kahneman and Tversky of course found a large variety of such cognitive biases in their research, which can only be understood by looking at nonlinear economic models. Unknownhttps://www.blogger.com/profile/10994509912655287453noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-49950671794091522252013-04-01T13:46:10.713-04:002013-04-01T13:46:10.713-04:00A macroeconomist should be doing policy evaluation...<i> A macroeconomist should be doing policy evaluation NOT forecasting.</i><br /><br />You cannot do policy evaluation without forecasting the consequences (even just in terms of probabilities) of alternative policy choices. Absalonhttps://www.blogger.com/profile/09131268683451462949noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-54745314311399932842013-04-01T12:49:34.988-04:002013-04-01T12:49:34.988-04:00I agree Dohsan but that is diagnostics not forecas...I agree Dohsan but that is diagnostics not forecasting. Can you suggest a doctor who will predict the NECESSARY AND SUFFICIENT conditions for a heart attack? I doubt that such a doctor exists. If so, how can we expect a macroeconomist to predict financial crisis? <br />A macroeconomist should be doing policy evaluation NOT forecasting. At least that is what Lucas's Econometric Policy Evaluation paper says. Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-51474706547048722502013-04-01T12:32:55.750-04:002013-04-01T12:32:55.750-04:00sorry I am sowing confusion by expressing myself p...sorry I am sowing confusion by expressing myself poorly.<br /><br />first my simple point. There is this thing called ABM. It is quite distinct from mainstream methodology in many important respects. Many people think it's a candidate for replacing mainstream economics. Yet I suspect it may suffer from the same morass of competing models as DSGE.<br /><br />I am under the impression that het agent DSGE is quite different from ABM. One normally works with distributions and summary statistics. You cannot say that agent 3104 encountered agent 9860 at 10.30am and offered an apple in return for an orange, and was declined. Which you can - sort of! - with ABM. Plus whilst of course you are correct that for many models you don't know what's going to happen until you hit go, there is a distinction here (I think this is what emergent behaviour means). As you allude, you don't do things like impose market clearing conditions and such like.Luis Enriquehttps://www.blogger.com/profile/09373244720653497312noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-86978167972660386922013-04-01T11:54:07.714-04:002013-04-01T11:54:07.714-04:00"I do not think that a macroeconomist should ..."I do not think that a macroeconomist should try to forecast the economic outcomes. Even a doctor cannot predict human health condition. Why should economists venture into such a thing?"<br /><br />A good doctor can diagnose problems with a patient and provide good probabilities of survival rate & pain suffered given various actions. A doctor who can not do that is fairly worthless. A doctor who is more often wrong is harmful.<br /><br />If macroeconomists can not diagnose and give the likelihood of future problems with an economy or pain suffered if various policies are implemented (or get the likelihoods of success and suffering wrong), then of what use is macroeconomics? This isn't theology, after all; macroeconomics _should_ be an applied discipline. Dohsanhttps://www.blogger.com/profile/07884148005077602324noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-61319159984897162732013-04-01T11:45:16.531-04:002013-04-01T11:45:16.531-04:00Yet why must economics be able to fit within a pie...Yet why must economics be able to fit within a piece of paper?Dohsanhttps://www.blogger.com/profile/07884148005077602324noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-70851190089169642962013-04-01T08:19:02.736-04:002013-04-01T08:19:02.736-04:00Yes, but Noah, DGSE models are very RIGOROUS!Yes, but Noah, DGSE models are very RIGOROUS!Peter Thttps://www.blogger.com/profile/13289172253358199028noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-23883755846757687182013-04-01T05:47:06.764-04:002013-04-01T05:47:06.764-04:00"Yeah. DSGE makes it impossible to see emerge..."Yeah. DSGE makes it impossible to see emergent behavior, because of the conditions the models impose to find the equilibrium..."<br /><br />Lot's of DSGE models have what the author might call "emergent behavior". They all get thrown out before a word of LaTeX is typed because that "emergent behavior" A. doesn't lead to lead to equilibrium (as Noah points out) but often also, B. make no sense.Anonymoushttps://www.blogger.com/profile/15400382660502823241noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-67378885498684531932013-03-31T20:04:44.316-04:002013-03-31T20:04:44.316-04:00right, yes I know DSGE employes representative age...<i>right, yes I know DSGE employes representative agents, but that's really quite a different thing from the agents in ABM</i><br /><br />There are quite a number of DSGE models with agent heterogeneity - not representative agents.<br /><br /><i>There are plenty of models that one could call simulations without being ABM.</i><br /><br />Of course, that's true!<br /><br /><i>As I understand it, the defining feature is that an ABM model consists of autonomous agents for whom you define some behavioural rules, particularly how they encounter and interact with other agents, and you don't know what kind of behaviour is going to emerge in the aggregate until you hit go and see what happens.</i><br /><br />That's also true of a DSGE model with heterogeneous agents and multiple equilibria...except you never get to "see what happens" unless you do some sort of simulation...<br /><br /><i>It's all about emergent behaviour and such like. I think that's quite a distinct idea from DSGE</i><br /><br />Yeah. DSGE makes it impossible to see emergent behavior, because of the conditions the models impose to find the equilibrium...<br /><br />Noah Smithhttps://www.blogger.com/profile/09093917601641588575noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-74626450640703007132013-03-31T17:46:43.276-04:002013-03-31T17:46:43.276-04:00I welcome you to write transcedental equations as ...I welcome you to write transcedental equations as long as it is properly microfounded without violating the discipline. All I am saying is that not to lose economics for the sake of computation. Don't lose moon for the numbers. Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-6210736594687956492013-03-31T16:55:06.048-04:002013-03-31T16:55:06.048-04:00right, yes I know DSGE employes representative age...right, yes I know DSGE employes representative agents, but that's really quite a different thing from the agents in ABM, and I don't think "simulation" quite captures it either. There are plenty of models that one could call simulations without being ABM. As I understand it, the defining feature is that an ABM model consists of autonomous agents for whom you define some behavioural rules, particularly how they encounter and interact with other agents, and you don't know what kind of behaviour is going to emerge in the aggregate until you hit go and see what happens. It's all about emergent behaviour and such like. I think that's quite a distinct idea from DSGE, but it faces two problems 1. it's hard to know exactly what features of your model are responsible for what you observe and 2. who knows what the right rules to specify for your agents are. These aren't insurmountable, but that could well result in a swamp of competing models and no clear answers. Luis Enriquehttps://www.blogger.com/profile/09373244720653497312noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-58448267881046442622013-03-31T16:12:53.361-04:002013-03-31T16:12:53.361-04:00"No one is particularly interested in intensi... "No one is particularly interested in intensive solutions of a single model,"<br /><br />So what the economics profession needs is a numerical analyst to write a general purpose solver for a broad class of DSGE models. Absalonhttps://www.blogger.com/profile/09131268683451462949noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-52291772535241266182013-03-31T15:55:03.724-04:002013-03-31T15:55:03.724-04:00Write a model as you wish as long as it gives a tr...<i>Write a model as you wish as long as it gives a tractable analytical solution on a piece of paper not on a computer.</i><br /><br />You can keep looking under the street light for the keys if you like, but it is unlikely that you are going to find them ...<br /><br />Even "analytical" solutions are generally expressed in terms of standard transcendental functions and we need to go to tables or computers to evaluate them.<br /><br />Absalonhttps://www.blogger.com/profile/09131268683451462949noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-37690979192096668072013-03-31T15:31:20.182-04:002013-03-31T15:31:20.182-04:00Good catch, thanks!Good catch, thanks!Noah Smithhttps://www.blogger.com/profile/09093917601641588575noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-62435482957220350692013-03-31T15:30:55.473-04:002013-03-31T15:30:55.473-04:00Lulz.
Too true.Lulz.<br /><br />Too true.Noah Smithhttps://www.blogger.com/profile/09093917601641588575noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-71690571218050829852013-03-31T15:30:40.011-04:002013-03-31T15:30:40.011-04:00I'm not sure, to be honest.I'm not sure, to be honest.Noah Smithhttps://www.blogger.com/profile/09093917601641588575noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-78136970877305459522013-03-31T15:29:54.873-04:002013-03-31T15:29:54.873-04:00Thanks, Ben!
If you have a chance, tell Dr. Waki ...Thanks, Ben!<br /><br />If you have a chance, tell Dr. Waki that I appreciate his work. :-)Noah Smithhttps://www.blogger.com/profile/09093917601641588575noreply@blogger.com