An interdisciplinary model for macroeconomics Dr Arthur Turrell
Advanced Analytics
Bank of England Economic Models - Post-Growth 2018 Conference - European Parliament - September 18, 2018 Views expressed are not those of the Bank of England or its policy committees and should not be reported as such.
Find out more:
Haldane, A. G., & Turrell, A. E. (2018).
An interdisciplinary model for macroeconomics.Â
Oxford Review of Economic Policy, 34(1-2), 219-251.
http://aeturrell.github.io/home/ @arthurturrell
Existing macroeconomic models have been very useful for our understanding. But could we do better by widening the pool of models we use?
Existing macroeconomic models have been very useful for our understanding. But could we do better by widening the pool of models we use? I think we can find complementary model approaches which extend our knowledge in new directions.
Other academic disciplines oer a wealth of possibilities for new approaches to macroeconomics, including on how to communicate complex ideas to a general audience.
Economics has been too insular 80
Cit at ions t o ot her disciplines, T
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H ealt h
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Biology
Engineer ing and Technology
Ot her Social Sciences Psychology H um anit ies Biom edical Resear ch
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Ear t h and Space
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Chem ist r y Clinical M edicine
M at hem at ics Physics
20 Econom ics
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30 40 50 60 Cit at ions fr om ot her disciplines, T
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Academic citations in and out of dierent disciplines, 1950-2015
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Too shallow a gene pool: ways in which pre-crisis models don’t do everything we need
Too shallow a gene pool: ways in which pre-crisis models don’t do everything we need
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No explicit role for finance - could neither explain how a large financial crisis could start, or propagate
Too shallow a gene pool: ways in which pre-crisis models don’t do everything we need
•
No explicit role for finance - could neither explain how a large financial crisis could start, or propagate
•
Everything is normal, with only small disturbances from equilibrium
Too shallow a gene pool: ways in which pre-crisis models don’t do everything we need
•
No explicit role for finance - could neither explain how a large financial crisis could start, or propagate
•
Everything is normal, with only small disturbances from equilibrium • World is non-linear and has ‘fat tailed’ distributions
Too shallow a gene pool: ways in which pre-crisis models don’t do everything we need
•
No explicit role for finance - could neither explain how a large financial crisis could start, or propagate
•
Everything is normal, with only small disturbances from equilibrium • World is non-linear and has ‘fat tailed’ distributions
•
Rational (model consistent) expectations
Too shallow a gene pool: ways in which pre-crisis models don’t do everything we need
•
No explicit role for finance - could neither explain how a large financial crisis could start, or propagate
•
Everything is normal, with only small disturbances from equilibrium • World is non-linear and has ‘fat tailed’ distributions
•
Rational (model consistent) expectations • Out of line with evidence on people’s actual behaviour
Too shallow a gene pool: ways in which pre-crisis models don’t do everything we need
•
No explicit role for finance - could neither explain how a large financial crisis could start, or propagate
•
Everything is normal, with only small disturbances from equilibrium • World is non-linear and has ‘fat tailed’ distributions
•
Rational (model consistent) expectations • Out of line with evidence on people’s actual behaviour • Real world highly uncertainty (Knightian uncertainty rather than risk)
Too shallow a gene pool: ways in which pre-crisis models don’t do everything we need
•
No explicit role for finance - could neither explain how a large financial crisis could start, or propagate
•
Everything is normal, with only small disturbances from equilibrium • World is non-linear and has ‘fat tailed’ distributions
•
Rational (model consistent) expectations • Out of line with evidence on people’s actual behaviour • Real world highly uncertainty (Knightian uncertainty rather than risk)
•
Everything is aggregate and everyone is the same
Too shallow a gene pool: ways in which pre-crisis models don’t do everything we need
•
No explicit role for finance - could neither explain how a large financial crisis could start, or propagate
•
Everything is normal, with only small disturbances from equilibrium • World is non-linear and has ‘fat tailed’ distributions
•
Rational (model consistent) expectations • Out of line with evidence on people’s actual behaviour • Real world highly uncertainty (Knightian uncertainty rather than risk)
•
Everything is aggregate and everyone is the same • No distributional effects
Model performance: Pre-crisis economic modelling was homogeneous and did not do well 4
Year-on-year growth, %
3 2 1 0 1 2 3 GDP data (2015 vintage) November 2007 Inflation Report
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Model performance: Pre-crisis economic modelling was homogeneous and did not do well
Why we need a more diverse set of macro models Economic argument - competition and complement
Scientific argument - with weak selection between models (because we cannot do experiments), many models will be more informative than a single model
Concrete examples of drawing on other disciplines Summary figure Schematic of the typical elements of an agent-based model
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‘Structural’ (non-statistical) models: agent-based models & heterogeneous agent models <- physics
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More statistical models: machine learning <- computer science
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Behavioural macroeconomics: psychology
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Big data to inform models: data science
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Staff from physics, computer science, linguistics, pyschology, mathematics, data science, …
ENVIRONMENT Agents
Agent-agent interactions
Agent-environment interactions
Labour market tightness (v/u) 0.0
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Turrell, A. (2016). Agent-based models: understanding the economy from the bottom up. Bank of England Quarterly Bulletin, 56(4), 173-188. Turrell, A., Speigner, B., Djumalieva, J., Copple, D., & Thurgood, J. (2018). Using job vacancies to understand the effects of labour market mismatch on UK output and productivity.
Model dissemination: One factor in low public trust of economists
Net trust by different groupings. Data shown are the results from a poll of 2,040 British adults over 14th–15th February 2017. ‘Leave’ and ‘Remain’ refer to respondents voting choice in the UK’s referendum of membership of the European Union. Source: YouGov.
Only 1 in 10 of the population think that public figures talk about economics in an accessible way
Communication: what we can learn from science •
Scientists are trusted
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Outreach to general public: talks, documentaries, engagement
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Consensus view pushed strongly on topics with wide agreement, eg climate change
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Good communication of uncertainty, eg weather
Communicating macroeconomics: What we’re doing • Visual summaries of policy decisions
• Sending economists into schools to engage with students
• “Three quarters of people think there should be better education about the economy and half want a better understanding themselves” - Bank research
• KnowledgeBank website with explainers on macro topics
• Experiments looking at how we can communicate better
• Why not create a Chair for the Public Understanding of Economics to better put across the consensus view (where it exists!)?