Stuff Happens - Or Why Ane Am Non A Fan Of Overlapping Generations Models
One could correctly summarise Newtonian physics as: stuff happens. However, this formulation tells us a lot less most the footing to a greater extent than or less us than his iii laws of motion. And my catch is that overlapping generations models are uncomfortably unopen to the "stuff happens" halt of the spectrum.
This How Not To Do Macroeconomics. "Unlearning Economics" stated that he would prefer seeing a stock-flow consistent model, as well as thence Nick Edmonds obliged yesteryear putting the results into such a framework.
I similar reading Nick Edmonds' articles, equally he knows a lot to a greater extent than most stock-flow consistent models than I do. But it appears that nosotros do non concord most the usefulness of overlapping generations models. That could merely endure the outcome of having different analytical objectives; I possess got a fairly narrow laid upward of things that I am interested inwards modelling.
I currently articulatio genus deep inwards looking at financial policy inside the DSGE framework. As the Eggertsson as well as Mehrotra article is likewise tangential for what I am working on right now, I did non become through the entire newspaper inwards detail. If I were to write most it, I promise I would halt upward with something similar to what Nick Edmonds wrote.* Instead, I desire to brand a to a greater extent than full general quest most "overlapping generations" models here.
I am non a fan of Dynamic Stochastic General Equilibrium (DSGE) models. One complication inwards discussing them is the fact that at that topographic point are 2 classes of DSGE models used inside macroeconomics.**
Overlapping generations models analyse spending patterns over individuals' lifetimes with some express realism, dissimilar the ludicrous infinitely long-lived Representative Household of occupation concern bike macro. However, inwards guild to model these savings plans, the models abstract out of existence the economical cycle. This is done to brand the models mathematically tractable. (Stochastic - the "S" inwards "DSGE" - is merely the mathematical term for random; it was derived from a Greek root.) "Unlearning Economics" pointed out the problems that arise when you lot eliminate the economic scheme from inside what is alleged to endure an economical model inwards his give-and-take of the Eggertsson as well as Mehrotra paper.
I believe that mainstream economists would strenuously object to my abrupt distinction betwixt the 2 classes of models. Both classes of models are driven yesteryear similar microeconomic assumptions. However, only the occupation concern bike macro models endeavour to depict occupation concern bike fluctuations.*** The occupation concern bike models also include some macro accounting identities. (My feeling is that at that topographic point are specified incorrectly, but that is a bailiwick for other articles.)
Even if nosotros convey the lack of a bike inside an overlapping generation model, the models are alone unfalsifiable. If nosotros facial expression at the model of Eggertsson as well as Mehrotra, at that topographic point are iii generations (young, workers, retirees). The model describes how cash volition flow alongside those historic flow cohorts based on the supposition that the households desire to polish their lifetime consumption.
But nosotros encounter an obvious occupation if nosotros wanted to jibe this model to an economy. This is a discrete-time model where the fourth dimension stride represents most thirty years.****
If nosotros laid upward 2014 equally t=0, the previous fourth dimension steps were 1984 (t=-1) as well as and thence 1954 (t=-2). An seek of economical history tells us that a lot happened over that period; the footing was extremely different at each of those points inwards time. Since at that topographic point is almost no human relationship of the acre of the footing betwixt fourth dimension points, at that topographic point is no useful agency of characterising the dynamics for the acre transitions from time t to time t+1.
The only purpose of such a model is to encounter how weather would alter now based on parameters changing. For example, if the charge per unit of measurement of involvement goes up, what happens equally a outcome of the alter inwards consumption plans? Economists are familiar with this trend of analysis; for decades economical fence largely consisted of drawing 2 lines on a chalkboard as well as arguing most the angles at which to pull the lines (or what would locomote on if you lot shift ane line). The switch to overlapping generations models puts a sparse veneer of mathematics over the graphical exercise. Even though the models are effectively only most the present, they appear to contain fourth dimension dynamics (the "D" is DSGE).
Unfortunately, a clever mathematician with likewise much fourth dimension on his or her hands tin do a slightly different overlapping generations model which generates a completely different outcome, fifty-fifty if the "behavioural parameters" used are the same. Since the overlapping generations models cannot endure empirically tested (we would need many centuries of economical data), at that topographic point is no agency of determining which model is "correct". In other words, nosotros are stuck at "stuff happens".
Although the mathematics behind the occupation concern bike DSGE models is questionable, at to the lowest degree fundamental banks tin purpose them to do linearisations that tin endure fitted to quarterly or monthly economical data. Those fitted models tin as well as thence endure used to generate falsifiable predictions. Given the depression character of the predictions, this does non give us much, but at to the lowest degree it looks to a greater extent than sophisticated than a span of lines on a chalkboard.
As a terminal point, the supposition that households invention out their consumption for the residue of their lives appears incorrect. I possess got merely launched a personal finance department of my spider web site, as well as my sense of the province of affairs is that I volition non endure able to assume that readers volition possess got spent whatsoever fourth dimension doing such a planning exercise. Such people do exist, but they seem to correspond a small-scale target audience. More importantly, the babe boomers are walking into a retirement crisis that would endure impossible to generate inside a model inwards which households polish their lifetime consumption levels.
In conclusion, these defects hateful that I do non await to pass much of my fourth dimension looking at overlapping generations models.
Footnotes:
* This is good, since I was mis-identified equally the writer of his article on Twitter. That helped my reputation, thence thanks!
** To brand life fifty-fifty to a greater extent than complicated, people do financial property pricing models inside a DSGE framework. I would non catch these equally macro models; they are microeconomic models at best. My profession catch is that they correspond a rather featherbrained approach to pricing financial instruments, but academics similar them because it gives them some other avenue to issue papers.
*** Well, "Real Business Cycle" models do non possess got a recognisable occupation concern bike that occurs inside them, but I catch those models equally beingness an elaborate practical joke beingness played on economic science graduate students.
**** There are overlapping generations models with finer fourth dimension scales, such equally ane year. But these models appeared to me to endure fifty-fifty farther from beingness able to model an economy.
See Also:
This How Not To Do Macroeconomics. "Unlearning Economics" stated that he would prefer seeing a stock-flow consistent model, as well as thence Nick Edmonds obliged yesteryear putting the results into such a framework.
I similar reading Nick Edmonds' articles, equally he knows a lot to a greater extent than most stock-flow consistent models than I do. But it appears that nosotros do non concord most the usefulness of overlapping generations models. That could merely endure the outcome of having different analytical objectives; I possess got a fairly narrow laid upward of things that I am interested inwards modelling.
I currently articulatio genus deep inwards looking at financial policy inside the DSGE framework. As the Eggertsson as well as Mehrotra article is likewise tangential for what I am working on right now, I did non become through the entire newspaper inwards detail. If I were to write most it, I promise I would halt upward with something similar to what Nick Edmonds wrote.* Instead, I desire to brand a to a greater extent than full general quest most "overlapping generations" models here.
Two Wings Of DSGE Macro
I am non a fan of Dynamic Stochastic General Equilibrium (DSGE) models. One complication inwards discussing them is the fact that at that topographic point are 2 classes of DSGE models used inside macroeconomics.**
- Business Cycle Macro Models These are the models with a Representative Household which plans its consumption from the acquaint until times goes to infinity. These models possess got generated a lot of contention on the cyberspace inwards recent years. These are the models I am interested in, as well as the ones that I mean value are mathematically dubious.
- Overlapping Generations Models. These may facial expression similar to the other models, but they are based on the planning problems for households with finite (and perhaps random) lifespans. The consumption as well as savings plans betwixt cohorts interact. I am non really interested inwards these models, for reasons I hash out below. Their saving grace is that the mathematical framework used appears correct.
Overlapping generations models analyse spending patterns over individuals' lifetimes with some express realism, dissimilar the ludicrous infinitely long-lived Representative Household of occupation concern bike macro. However, inwards guild to model these savings plans, the models abstract out of existence the economical cycle. This is done to brand the models mathematically tractable. (Stochastic - the "S" inwards "DSGE" - is merely the mathematical term for random; it was derived from a Greek root.) "Unlearning Economics" pointed out the problems that arise when you lot eliminate the economic scheme from inside what is alleged to endure an economical model inwards his give-and-take of the Eggertsson as well as Mehrotra paper.
I believe that mainstream economists would strenuously object to my abrupt distinction betwixt the 2 classes of models. Both classes of models are driven yesteryear similar microeconomic assumptions. However, only the occupation concern bike macro models endeavour to depict occupation concern bike fluctuations.*** The occupation concern bike models also include some macro accounting identities. (My feeling is that at that topographic point are specified incorrectly, but that is a bailiwick for other articles.)
Influenza A virus subtype H5N1 Question Of Time
Even if nosotros convey the lack of a bike inside an overlapping generation model, the models are alone unfalsifiable. If nosotros facial expression at the model of Eggertsson as well as Mehrotra, at that topographic point are iii generations (young, workers, retirees). The model describes how cash volition flow alongside those historic flow cohorts based on the supposition that the households desire to polish their lifetime consumption.
But nosotros encounter an obvious occupation if nosotros wanted to jibe this model to an economy. This is a discrete-time model where the fourth dimension stride represents most thirty years.****
If nosotros laid upward 2014 equally t=0, the previous fourth dimension steps were 1984 (t=-1) as well as and thence 1954 (t=-2). An seek of economical history tells us that a lot happened over that period; the footing was extremely different at each of those points inwards time. Since at that topographic point is almost no human relationship of the acre of the footing betwixt fourth dimension points, at that topographic point is no useful agency of characterising the dynamics for the acre transitions from time t to time t+1.
The only purpose of such a model is to encounter how weather would alter now based on parameters changing. For example, if the charge per unit of measurement of involvement goes up, what happens equally a outcome of the alter inwards consumption plans? Economists are familiar with this trend of analysis; for decades economical fence largely consisted of drawing 2 lines on a chalkboard as well as arguing most the angles at which to pull the lines (or what would locomote on if you lot shift ane line). The switch to overlapping generations models puts a sparse veneer of mathematics over the graphical exercise. Even though the models are effectively only most the present, they appear to contain fourth dimension dynamics (the "D" is DSGE).
Unfortunately, a clever mathematician with likewise much fourth dimension on his or her hands tin do a slightly different overlapping generations model which generates a completely different outcome, fifty-fifty if the "behavioural parameters" used are the same. Since the overlapping generations models cannot endure empirically tested (we would need many centuries of economical data), at that topographic point is no agency of determining which model is "correct". In other words, nosotros are stuck at "stuff happens".
Although the mathematics behind the occupation concern bike DSGE models is questionable, at to the lowest degree fundamental banks tin purpose them to do linearisations that tin endure fitted to quarterly or monthly economical data. Those fitted models tin as well as thence endure used to generate falsifiable predictions. Given the depression character of the predictions, this does non give us much, but at to the lowest degree it looks to a greater extent than sophisticated than a span of lines on a chalkboard.
Yes, They Are Totally Unrealistic Models
As a terminal point, the supposition that households invention out their consumption for the residue of their lives appears incorrect. I possess got merely launched a personal finance department of my spider web site, as well as my sense of the province of affairs is that I volition non endure able to assume that readers volition possess got spent whatsoever fourth dimension doing such a planning exercise. Such people do exist, but they seem to correspond a small-scale target audience. More importantly, the babe boomers are walking into a retirement crisis that would endure impossible to generate inside a model inwards which households polish their lifetime consumption levels.
In conclusion, these defects hateful that I do non await to pass much of my fourth dimension looking at overlapping generations models.
Footnotes:
* This is good, since I was mis-identified equally the writer of his article on Twitter. That helped my reputation, thence thanks!
** To brand life fifty-fifty to a greater extent than complicated, people do financial property pricing models inside a DSGE framework. I would non catch these equally macro models; they are microeconomic models at best. My profession catch is that they correspond a rather featherbrained approach to pricing financial instruments, but academics similar them because it gives them some other avenue to issue papers.
*** Well, "Real Business Cycle" models do non possess got a recognisable occupation concern bike that occurs inside them, but I catch those models equally beingness an elaborate practical joke beingness played on economic science graduate students.
**** There are overlapping generations models with finer fourth dimension scales, such equally ane year. But these models appeared to me to endure fifty-fifty farther from beingness able to model an economy.
See Also:
- re-derived the results using a stock-flow consistent model. His article was inwards reply to the critique of the newspaper yesteryear "Unlearning Economics" - How Not To Do Macroeconomics. "Unlearning Economics" stated that he would prefer seeing a stock-flow consistent model, as well as thence Nick Edmonds obliged yesteryear putting the results into such a framework.
I similar reading Nick Edmonds' articles, equally he knows a lot to a greater extent than most stock-flow consistent models than I do. But it appears that nosotros do non concord most the usefulness of overlapping generations models. That could merely endure the outcome of having different analytical objectives; I possess got a fairly narrow laid upward of things that I am interested inwards modelling.
I currently articulatio genus deep inwards looking at financial policy inside the DSGE framework. As the Eggertsson as well as Mehrotra article is likewise tangential for what I am working on right now, I did non become through the entire newspaper inwards detail. If I were to write most it, I promise I would halt upward with something similar to what Nick Edmonds wrote.* Instead, I desire to brand a to a greater extent than full general quest most "overlapping generations" models here.
Two Wings Of DSGE Macro
I am non a fan of Dynamic Stochastic General Equilibrium (DSGE) models. One complication inwards discussing them is the fact that at that topographic point are 2 classes of DSGE models used inside macroeconomics.**
- Business Cycle Macro Models These are the models with a Representative Household which plans its consumption from the acquaint until times goes to infinity. These models possess got generated a lot of contention on the cyberspace inwards recent years. These are the models I am interested in, as well as the ones that I mean value are mathematically dubious.
- Overlapping Generations Models. These may facial expression similar to the other models, but they are based on the planning problems for households with finite (and perhaps random) lifespans. The consumption as well as savings plans betwixt cohorts interact. I am non really interested inwards these models, for reasons I hash out below. Their saving grace is that the mathematical framework used appears correct.
Overlapping generations models analyse spending patterns over individuals' lifetimes with some express realism, dissimilar the ludicrous infinitely long-lived Representative Household of occupation concern bike macro. However, inwards guild to model these savings plans, the models abstract out of existence the economical cycle. This is done to brand the models mathematically tractable. (Stochastic - the "S" inwards "DSGE" - is merely the mathematical term for random; it was derived from a Greek root.) "Unlearning Economics" pointed out the problems that arise when you lot eliminate the economic scheme from inside what is alleged to endure an economical model inwards his give-and-take of the Eggertsson as well as Mehrotra paper.
I believe that mainstream economists would strenuously object to my abrupt distinction betwixt the 2 classes of models. Both classes of models are driven yesteryear similar microeconomic assumptions. However, only the occupation concern bike macro models endeavour to depict occupation concern bike fluctuations.*** The occupation concern bike models also include some macro accounting identities. (My feeling is that at that topographic point are specified incorrectly, but that is a bailiwick for other articles.)
Influenza A virus subtype H5N1 Question Of Time
Even if nosotros convey the lack of a bike inside an overlapping generation model, the models are alone unfalsifiable. If nosotros facial expression at the model of Eggertsson as well as Mehrotra, at that topographic point are iii generations (young, workers, retirees). The model describes how cash volition flow alongside those historic flow cohorts based on the supposition that the households desire to polish their lifetime consumption.
But nosotros encounter an obvious occupation if nosotros wanted to jibe this model to an economy. This is a discrete-time model where the fourth dimension stride represents most thirty years.****
If nosotros laid upward 2014 equally t=0, the previous fourth dimension steps were 1984 (t=-1) as well as and thence 1954 (t=-2). An seek of economical history tells us that a lot happened over that period; the footing was extremely different at each of those points inwards time. Since at that topographic point is almost no human relationship of the acre of the footing betwixt fourth dimension points, at that topographic point is no useful agency of characterising the dynamics for the acre transitions from time t to time t+1.
The only purpose of such a model is to encounter how weather would alter now based on parameters changing. For example, if the charge per unit of measurement of involvement goes up, what happens equally a outcome of the alter inwards consumption plans? Economists are familiar with this trend of analysis; for decades economical fence largely consisted of drawing 2 lines on a chalkboard as well as arguing most the angles at which to pull the lines (or what would locomote on if you lot shift ane line). The switch to overlapping generations models puts a sparse veneer of mathematics over the graphical exercise. Even though the models are effectively only most the present, they appear to contain fourth dimension dynamics (the "D" is DSGE).
Unfortunately, a clever mathematician with likewise much fourth dimension on his or her hands tin do a slightly different overlapping generations model which generates a completely different outcome, fifty-fifty if the "behavioural parameters" used are the same. Since the overlapping generations models cannot endure empirically tested (we would need many centuries of economical data), at that topographic point is no agency of determining which model is "correct". In other words, nosotros are stuck at "stuff happens".
Although the mathematics behind the occupation concern bike DSGE models is questionable, at to the lowest degree fundamental banks tin purpose them to do linearisations that tin endure fitted to quarterly or monthly economical data. Those fitted models tin as well as thence endure used to generate falsifiable predictions. Given the depression character of the predictions, this does non give us much, but at to the lowest degree it looks to a greater extent than sophisticated than a span of lines on a chalkboard.
Yes, They Are Totally Unrealistic Models
As a terminal point, the supposition that households invention out their consumption for the residue of their lives appears incorrect. I possess got merely launched a personal finance department of my spider web site, as well as my sense of the province of affairs is that I volition non endure able to assume that readers volition possess got spent whatsoever fourth dimension doing such a planning exercise. Such people do exist, but they seem to correspond a small-scale target audience. More importantly, the babe boomers are walking into a retirement crisis that would endure impossible to generate inside a model inwards which households polish their lifetime consumption levels.
In conclusion, these defects hateful that I do non await to pass much of my fourth dimension looking at overlapping generations models.
Footnotes:
* This is good, since I was mis-identified equally the writer of his article on Twitter. That helped my reputation, thence thanks!
** To brand life fifty-fifty to a greater extent than complicated, people do financial property pricing models inside a DSGE framework. I would non catch these equally macro models; they are microeconomic models at best. My profession catch is that they correspond a rather featherbrained approach to pricing financial instruments, but academics similar them because it gives them some other avenue to issue papers.
*** Well, "Real Business Cycle" models do non possess got a recognisable occupation concern bike that occurs inside them, but I catch those models equally beingness an elaborate practical joke beingness played on economic science graduate students.
**** There are overlapping generations models with finer fourth dimension scales, such equally ane year. But these models appeared to me to endure fifty-fifty farther from beingness able to model an economy.
See Also:
- An overview of my skeptical views most DSGE macro models.
- How Not To Do Macroeconomics. "Unlearning Economics" stated that he would prefer seeing a stock-flow consistent model, as well as thence Nick Edmonds obliged yesteryear putting the results into such a framework.
I similar reading Nick Edmonds' articles, equally he knows a lot to a greater extent than most stock-flow consistent models than I do. But it appears that nosotros do non concord most the usefulness of overlapping generations models. That could merely endure the outcome of having different analytical objectives; I possess got a fairly narrow laid upward of things that I am interested inwards modelling.
I currently articulatio genus deep inwards looking at financial policy inside the DSGE framework. As the Eggertsson as well as Mehrotra article is likewise tangential for what I am working on right now, I did non become through the entire newspaper inwards detail. If I were to write most it, I promise I would halt upward with something similar to what Nick Edmonds wrote.* Instead, I desire to brand a to a greater extent than full general quest most "overlapping generations" models here.
Two Wings Of DSGE Macro
I am non a fan of Dynamic Stochastic General Equilibrium (DSGE) models. One complication inwards discussing them is the fact that at that topographic point are 2 classes of DSGE models used inside macroeconomics.**
- Business Cycle Macro Models These are the models with a Representative Household which plans its consumption from the acquaint until times goes to infinity. These models possess got generated a lot of contention on the cyberspace inwards recent years. These are the models I am interested in, as well as the ones that I mean value are mathematically dubious.
- Overlapping Generations Models. These may facial expression similar to the other models, but they are based on the planning problems for households with finite (and perhaps random) lifespans. The consumption as well as savings plans betwixt cohorts interact. I am non really interested inwards these models, for reasons I hash out below. Their saving grace is that the mathematical framework used appears correct.
Overlapping generations models analyse spending patterns over individuals' lifetimes with some express realism, dissimilar the ludicrous infinitely long-lived Representative Household of occupation concern bike macro. However, inwards guild to model these savings plans, the models abstract out of existence the economical cycle. This is done to brand the models mathematically tractable. (Stochastic - the "S" inwards "DSGE" - is merely the mathematical term for random; it was derived from a Greek root.) "Unlearning Economics" pointed out the problems that arise when you lot eliminate the economic scheme from inside what is alleged to endure an economical model inwards his give-and-take of the Eggertsson as well as Mehrotra paper.
I believe that mainstream economists would strenuously object to my abrupt distinction betwixt the 2 classes of models. Both classes of models are driven yesteryear similar microeconomic assumptions. However, only the occupation concern bike macro models endeavour to depict occupation concern bike fluctuations.*** The occupation concern bike models also include some macro accounting identities. (My feeling is that at that topographic point are specified incorrectly, but that is a bailiwick for other articles.)
Influenza A virus subtype H5N1 Question Of Time
Even if nosotros convey the lack of a bike inside an overlapping generation model, the models are alone unfalsifiable. If nosotros facial expression at the model of Eggertsson as well as Mehrotra, at that topographic point are iii generations (young, workers, retirees). The model describes how cash volition flow alongside those historic flow cohorts based on the supposition that the households desire to polish their lifetime consumption.
But nosotros encounter an obvious occupation if nosotros wanted to jibe this model to an economy. This is a discrete-time model where the fourth dimension stride represents most thirty years.****
If nosotros laid upward 2014 equally t=0, the previous fourth dimension steps were 1984 (t=-1) as well as and thence 1954 (t=-2). An seek of economical history tells us that a lot happened over that period; the footing was extremely different at each of those points inwards time. Since at that topographic point is almost no human relationship of the acre of the footing betwixt fourth dimension points, at that topographic point is no useful agency of characterising the dynamics for the acre transitions from time t to time t+1.
The only purpose of such a model is to encounter how weather would alter now based on parameters changing. For example, if the charge per unit of measurement of involvement goes up, what happens equally a outcome of the alter inwards consumption plans? Economists are familiar with this trend of analysis; for decades economical fence largely consisted of drawing 2 lines on a chalkboard as well as arguing most the angles at which to pull the lines (or what would locomote on if you lot shift ane line). The switch to overlapping generations models puts a sparse veneer of mathematics over the graphical exercise. Even though the models are effectively only most the present, they appear to contain fourth dimension dynamics (the "D" is DSGE).
Unfortunately, a clever mathematician with likewise much fourth dimension on his or her hands tin do a slightly different overlapping generations model which generates a completely different outcome, fifty-fifty if the "behavioural parameters" used are the same. Since the overlapping generations models cannot endure empirically tested (we would need many centuries of economical data), at that topographic point is no agency of determining which model is "correct". In other words, nosotros are stuck at "stuff happens".
Although the mathematics behind the occupation concern bike DSGE models is questionable, at to the lowest degree fundamental banks tin purpose them to do linearisations that tin endure fitted to quarterly or monthly economical data. Those fitted models tin as well as thence endure used to generate falsifiable predictions. Given the depression character of the predictions, this does non give us much, but at to the lowest degree it looks to a greater extent than sophisticated than a span of lines on a chalkboard.
Yes, They Are Totally Unrealistic Models
As a terminal point, the supposition that households invention out their consumption for the residue of their lives appears incorrect. I possess got merely launched a personal finance department of my spider web site, as well as my sense of the province of affairs is that I volition non endure able to assume that readers volition possess got spent whatsoever fourth dimension doing such a planning exercise. Such people do exist, but they seem to correspond a small-scale target audience. More importantly, the babe boomers are walking into a retirement crisis that would endure impossible to generate inside a model inwards which households polish their lifetime consumption levels.
In conclusion, these defects hateful that I do non await to pass much of my fourth dimension looking at overlapping generations models.
Footnotes:
* This is good, since I was mis-identified equally the writer of his article on Twitter. That helped my reputation, thence thanks!
** To brand life fifty-fifty to a greater extent than complicated, people do financial property pricing models inside a DSGE framework. I would non catch these equally macro models; they are microeconomic models at best. My profession catch is that they correspond a rather featherbrained approach to pricing financial instruments, but academics similar them because it gives them some other avenue to issue papers.
*** Well, "Real Business Cycle" models do non possess got a recognisable occupation concern bike that occurs inside them, but I catch those models equally beingness an elaborate practical joke beingness played on economic science graduate students.
**** There are overlapping generations models with finer fourth dimension scales, such equally ane year. But these models appeared to me to endure fifty-fifty farther from beingness able to model an economy.
See Also:
(c) Brian Romanchuk 2014
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