Thursday, November 8, 2012

Here we go again: ABM versus DSGE

The last recession has lead to a lot of questioning about the economics profession and in particular macroeconomics. Sadly, a lot of this is rather ill-informed, including from within the profession. It is a fact that the most popular models have unique equilibria, but I remain unconvinced that what we have observed is the economy switching from one equilibrium to the other. Models that include no significant banking sector were the norm, but others were available when the need came, and more were quickly developed.

But what irks me most is that because DSGE models have somehow failed, they would need to be scrapped altogether and replaced by agent-based models, as last argued by Giorgio Fagiolo and Andrea Roventini. First, you want to improve on what we have, not throw out the baby with the bathwater. When the AIDS epidemic erupted, did we throw the whole medical profession under the bus and start from scratch with a new medical paradigm (say, aromatherapy)? No, we devoted a lot of resources to understand what is happening with the current scientists using their established methods. With this recession, some vocal people have called to scrap most of existing macroeconomics, defund research and even defund statistical agencies that try to understand what is going on.

Second, the claim that agent-based computing is any better is ludicrous. Modern macroeconomic theory is abundant in models with heterogeneous agents, learning, information issues, and perturbations. While agent-based models can potentially offer all this, they do it in a very ad hoc fashion. the modeler has to set how agents behave, and you can obtain virtually any results depending on what you assume. Sadly, there is very little effort devoted to relate the assumption with anything found in reality. The calibration based on some data is virtually absent, thus nothing can be learned. Unless you put some discipline in those models, they are useless. And once they have that discipline, I guess they are going to be quite close to heterogeneous DSGE models.

PS: Beyond having an old-fashioned view of the standard DSGE model, Fagiolo and Roventini portray the DSGE model as a three equation IS-LM model with Calvo pricing. That is definitively not a DSGE model. And ABM models are only now starting to include a very simple banking sector. So much for claiming to be able to answer current questions.


not a name said...

EL, you are far too kind.

Let's call a spade a spade: The vast majority of people who have been calling for a revolution in macro aren't interested creating a new paradigm to better the science, they're interested in creating a new paradigm so that they are always correct. It makes sense, of course: If you can't win the game, change the rules.

It's a symptom of the public face of macro, which has become an ego-driven disgrace to economics as a whole. Pretty much all the blogs I can think of, as far as I can tell, are built around the strategy of trolling Krugman hard enough that he links to them in a counterargument and sends NYT traffic. It's made web-based economics discussion untenable--I can probably count on one hand the blogs that are active and not terrible.

Back to the article, though. I found a particularly egregious line which I wish you'd highlighted: "Notice that, unlike economists supporting the NNS approach--who hold strong theoretical priors rooted in the DSGE model--ACE scholars are more interested in developing plausible theories, which however are not dogmatically deemed to be the 'correct' ones". Thank the lord these guys have come to save us from the dogma of DSGE! Oh, what scholars!

Anonymous said...

"Oh, what scholars!"

Is this EMJR meme making the wider rounds? It's one of my favorites. And it is certainly justified in this case.

not a name said...

Same. Although I think the better (and more appropriate) meme here is "macro no good."