Arthur Turrell, an interdisciplinary model for macroeconomics

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

70

H ealt h

60 Ar t s

50

Biology

Engineer ing and Technology

Ot her Social Sciences Psychology H um anit ies Biom edical Resear ch

40

Ear t h and Space

30

Chem ist r y Clinical M edicine

M at hem at ics Physics

20 Econom ics

10 10

20

30 40 50 60 Cit at ions fr om ot her disciplines, T

70

Academic citations in and out of dierent disciplines, 1950-2015

80

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

•

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

4 2000

2002

2004

2006

2008

2010

2012

2014

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

•

‘Structural’ (non-statistical) models: agent-based models & heterogeneous agent models <- physics

•

More statistical models: machine learning <- computer science

•

Behavioural macroeconomics: psychology

•

Big data to inform models: data science

•

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

0.2

0.4

0.6

0.8

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

•

Outreach to general public: talks, documentaries, engagement

•

Consensus view pushed strongly on topics with wide agreement, eg climate change

•

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!)?