A Comment On Mathematical Models Inward Economics

This article is a followup comment on a expert article yesteryear Nick Edmonds,  "On The Role Of Models", inwards which he discusses the purpose of mathematical models inwards economics. I concur amongst what he has to say, but I only desire to add together a comment on how I approach this topic.

I would kickoff banker's complaint that I am fairly skeptical almost mainstream economical models, inwards item DSGE models. This is non only an aversion to the mathematics, or the lack of realism of the underlying assumptions. (For example, Steve Keen is a good known critic of the realism of the underlying assumptions of "neoclassical" economics.)  Instead, fifty-fifty if nosotros accept every bit given the model assumptions, in that place are even together with so difficulties amongst how the models are constructed together with interpreted. This is a large subject, which volition accept fourth dimension for me to cover, but I plough over every bit examples of such analysis:

• The problems associated amongst applying the logic of single-good economical model to existent economies.
• The pursuit of Quantitative Easing (QE) yesteryear fundamental banks, even though mainstream modelling assumptions should imply that QE is ineffective.
• Nick Rowe argues that the measure New Keynesian models assume total occupation in this article on Worthwhile Canadian initiative. (Rowe: "They direct maintain been didactics their students to just assume the economic scheme eventually approaches total employment, even though in that place is absolutely aught inwards the model to order it should.")

Nick Edmonds follows inwards the tradition of Wynne Godley inwards using Stock-Flow Consistent (SFC) models every bit didactics models ("didactic models").  I direct maintain non yet had a peril to unveil my ain SFC models (under development), but the reckon is that nosotros tin dismiss larn almost the potential dynamics of an economy, fifty-fifty if nosotros create non receive to fit the model to actual economical data. In other words, nosotros tin dismiss purpose it to larn almost what is possible, but non to brand forecasts for upcoming quarters.

I mean value this is useful, but it is clear that nosotros direct maintain to compare the model dynamics to existent globe data. As an example, accept the hyperinflation model of Vincent Cate. (If yous follow the link, the model dynamics are available online.) I direct maintain alone looked at the model quickly, but it appears to me that it would move possible to tweak the model together with so that hyperinflations never occur.

How to create upwards one's heed which modelling supposition is correct? If these are didactics models, what just are nosotros teaching? We require to compare the implied dynamics of the model to existent globe data. In the instance of the hyperinflation model, I facial expression that the problems volition demonstrate upwards inwards the assumed model for the velocity of money, together with the next frictions to the idealized behaviour:

• Wages inwards modern economies are non indexed to the cost marker at a high frequency. Wage contracts are typically fixed i twelvemonth at a time. This limits the possibility of consumption to tally an assumed rising inwards the CPI level.
• Taxes are imposed on nominal wages, together with taxation rates rising every bit payoff increase. This volition create an increasing financial drag.

These factors should demonstrate upwards inwards the historical data, together with hence it volition move possible to validate whether the didactics model is a reasonable approximation to reality. But the key is that fifty-fifty if nosotros create non receive to fit the model parameters to existent data, nosotros even together with so require to banking concern check whether the dynamics brand sense.

(c) Brian Romanchuk 2013