The economy needs agent-based modelling (pdf, 2009) Oct 09 2019 09:51 languageMoneyScience
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JD Farmer, D Foley - Nature, 2009 - nature.com
The leaders of the world are flying the economy by the seat of their pants, say J. Doyne Farmer and Duncan Foley. There is, however, a better way to help guide financial policies.
In today’s high-tech age, one naturally assumes that US President Barack Obama’s economic team and its inter-national counterparts are using sophis-ticated quantitative computer models to guide us out of the current economic crisis. They are not.The best models they have are of two types, both with fatal flaws. Type one is econometric: empirical statistical models that are fitted to past data. These suc-cessfully forecast a few quarters ahead as long as things stay more or less the same, but fail in the face of great change. Type two goes by the name of ‘dynamic stochastic general equilibrium’. These models assume a perfect world, and by their very nature rule out crises of the type we are experiencing now.