- DSGE models ignore agent interactions which are crucial if one cares about aggregate macroeconomic dynamics, and
- DSGE models ignore meaningful heterogeneity (to my knowledge the only types of heterogeneity that DSGE models incorporate are ex post random differences in agent endowments and shocks. Ex ante all agents are identical.)

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## Monday, August 2, 2010

### Interesting Congressional Testimony...

Congressional Testimony by David Colander, Scott Page, Sidney Winter, and V.V. Chari on "Building a Science of Economics for the Real World" (Robert Solow also testified as a part of this panel, and his testimony on DSGE's was the subject of a previous post). Solow, Colander, Page, and Winter discourage the sole use of DSGE models AND provide viable alternatives...Chari's testimony in defense of DSGE's as the ONLY acceptable macroeconomic modeling strategy is ridiculous. Chari fails to address the two major criticisms of the DSGE framework raised by the other panel members:

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I'm not unsympathetic to the anti DSGE movement. It is very plausible that meaningful heterogeneity (allthough the Melitz trade model has variable talent in the model) and agent interactions are important. However, I think the argument would benefit greatly if a simple, simple model could be made which gives significantly different predictions dependent on whether we allow heterogeneity, agent interaction or neither. Even better would be if we had it without including anything non-homoeconomicus. Is this a big ask? Or has it been done already? Probably. So if so lets dig it out.

ReplyDeleteWhen James says "lets dig it out", I suspect he's using "lets" in an unconventional way.

ReplyDeleteBut more to the point: what particular complex systems insights would you like Chari to be familiar with? My view of the complex systems literature within economics is that it has a lot of promise (e.g. from more realistic inputs) but has failed to deliver results which are sufficiently generalizable to be convincing. Page is not an economist, and neither he nor any of the other Santa Fe complexity types seem to have convincing models of the economy.

And much as I really do despise DGSE models, they, like most conventional economics models, at least have the virtue that you can get under the hood and see what the moving parts are. I think much of the skepticism within the econ community about complex systems is that the models are too complicated to evaluate properly from the outside, and so readers/reviewers have a hard time knowing which assumptions drive the results.

I wish that had been shorter.

Sean, many of the criticisms about complex systems models (i.e., that they are difficult to validate, the models are too complicated to see which assumptions are driving results, etc.) could be, but usually aren't, leveled at the heterogeneous agent DSGE models that Chari refers to in his testimony. Once heterogeneity is introduced into a model, things can get very complicated very quickly and it is sometimes difficult to see what assumptions are driving the model. I suspect that one reason that such critiques are not often made of the heterogeneous agent DSGE models is that mainstream economists are more comfortable/familiar with the tools used to build these models than they are with the computer programming tools used to build many agent-based models...maybe I am off-base with this (I am sure that there are tons of economists who can program...)

ReplyDeleteI am thinking about putting together some slides/lecture notes on agent-based models using Axtell and Epstein's Sugar-scape models and their JAVA software program called ASCAPE. These are some VERY simple agent-based models of the economy that also generate interesting results. While the exercise would be useful for me as part of my research, I might as well share it with everyone else. Do you think people (other PhD students) would be interested in playing around with some simple agent-based models?

I would.

ReplyDelete