Economics Department
24-25 Feb 2014 ESRC Diversity in Macroeconomics
Conference
Program Committee
Paul De Grauwe (London School of Economics)
Cars Hommes (University of Amsterdam)
Sujit Kapadia (Bank of England)
Sheri Markose Chair (University of Essex)
Paul Sanderson (Economic and Social Research Council)
Introduction: From the
pragmatic to the esoteric
Setting the scene
• Jean-Claude Trichet’s plaintive cry that nothing in macro
models that came from top academics from
MIT/Harvard/Chicago (note I do not include the great
British institutions Ox-Bridge/LSE as much of their work
is derived from across the Atlantic) was of little use when
2007 crisis hit the buffers
• ESRC concerned about the dearth of operational
relevance (prompted by complaints from policy makers)
and the derivative nature of British academic economics
despite of £millions being pumped in: Have we been
reduced to scribes and penpushers ?
• In the 25 years I have been in the profession, we only
had more of the same: optimization and econometrics
What is missing ?: Fundamental Radical Uncertainty
Coming from Novelty Based Structure Changing Behaviour
• The main problem with policy design: limited incorporation of
strategic behaviour in terms of concrete institutional
innovations.
• In Linear Quadratic Guassian Models where we maximize a
quadratic objective function the only thing that stands in the
way of the policy maker achieving his target is white noisenot uber intelligent regulatees gaming the system
• Goodhart Keynes Lecture :One of the central problems is that
uncertainty is far more insidious and pervasive than
represented by additive error terms in standard models”
• I counted 6 different exogenous shocks in the Smets et al
ECB paper (productivity shocks, output gap…) ; environments
that can be learnt by linear least squares error minimizing !
David Jones (2000), member of Board of Governors of the
Fed Or What Gary Gorton calls the lack of incentives to
study the $14 Trillion worth of leverage in shadow banking
that upended Western Economies
• Jones on why little study done on regulatory capital arbitrage
entailed in securitization and other financial innovations: “absent
measures to reduce incentives or opportunities for regulatory capital
arbitrage over time such developments could undermine the
usefulness of formal capital requirement as prudential policy tools”.
Jones (2000) concluded that it was a lack of data for econometric
modelling that prevented academic or regulators from keeping track
of activities that undermined stated policy objectives in Basel II. Are
there no other ways of finding out how structures are changing ?
• In a complex adaptive system no party has the luxury of withdrawing
from the coevolutionary game and precommit like Kydland-Prescott
macro-policy doctrines say to a fixed rule to the exclusion of all else:
Robert Axelrod (2003) System Failure occurs because coevolution
is overlooked
• Simplify policy- monitor and enforce meticulously Haldane/Kapadia et al
Macroeconometrics External Data Driven but runs into Lucas Critique
type problems ; DSGE Calibration of a single representative agents
(minimal external data driven constraints) What else is out there ?
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Agent Based Macro/Macro
Prudential
Agents are computer programs
and can interact with one
another; Dynamics not prespecified by equations
ICT data base driven multi-agent
networks: glorified data
visualizations:
Haldane/Buchanan Star Trek
Vision
Vintage Santa Fe Institute
Artificial Stock Market Model :
Self-Reflexivity of Prices and
Contrarian Payoff Structure in
stock market game leading to
impossibility of homogeneity and
of homogenous Rational
Expectations
Brian Arthur’s genius intuition on
why it is rational to be contrarian
and anti-herd creating
endogenous boom and bust –
the source of heterogeneity not
understood by most Agent
based modellers
Behavioural
Macro/Finance
•
•
•
•
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Cognitive Biases
Bounded Rational
Behaviours
Business Cycle mixed up
with problems of
asymmetric information
and solutions such as
least squares learning
Hayek(1947), Lucas
Island Model
Akerlof/Lemons.
One behaviour missing :
Protean, innovative :
hyperintelligence
Complexity Sciences and
Complexity Economics
•
•
•
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Self-organization,
emergence, Scottish
Enlightenment
‘spontaneous order’
Ceaseless Innovation
Novelty – new
technologies not previously
there: creative destruction
Brick-bats are thrown at
DSGE and micro/game
theory is held to be ok :
Not so as there is no game
in which there is strategic
innovation and existential
incompleteness
Here is one I made before: Banks and Non Bank Financial
Intermediaries- The hard realization that mutual funds and
insurance companies and not banks are the net liquidity
providers
In a nutshell
Other (s)
How to move beyond
asymmetric
information models to
those on radical
uncertainty with
endogenous novelty
production ?
Known
Known
Unknown
Col1
Col 2
(Known,Known)
(Known, Unknown)
Private Information
Common Knowledge
Self
Unknown
(Unknown,Known)
Private ignorance
Asymmetric
Information
(Unknown,
Unknown)
Radical Uncertainty
With novelty
production when
we step outside
listable sets of
actions