On Models

Ryan Decker has a blog post on DSGE models. Although I don’t like DSGE models, I think he has something nice to say about modeling:

We must get econ pundits to understand that we’re all using models, including non-economist bloggers, even if they’re not written down as mathematical expressions. Writing a model down in its entirety so that its assumptions are made explicit and its internal workings can be examined by anyone is an act of intellectual humility. It is baffling to me that people who write down their models formally so we can all argue about them are supposedly worse and more arrogant than those who think they can identify a narrative model’s assumptions and keep it internally consistent.

James Tobin had something similar to say in his 1982 Nobel lecture Money and Finance in the Macroeconomic Process (alternative link):

Theoretical macroeconomic models of one brand or another are very influential. They guide the architects of econometric forecasting models. They shape the thinking of policymakers and their advisers about “the way the world works.” They color the views of journalists, managers, teachers, housewives, politicians, and voters. Almost everyone thinks about the economy, tries to understand it, and has opinions on how to improve its performance. Anyone who does so uses a model, even if it is vague and informal.

[emphasis added]

In his 1999 paper Money And Credit In A Keynesian Model Of Income Determination, Wynne Godley says:

This paper takes a step in the right direction by incorporating EM [endogenous money] ideas into a complete, if very much simplified model of the whole economy. Writings on monetary theory commonly rely solely on a narrative method which puts a strain on the reader’s imagination and makes disagreements difficult to resolve. The narratives in this paper will all describe simulations which are grounded in a rigorous model, which will make it possible to pin down exactly why the results come out as they do.

Personally I find stock-flow consistent models extremely useful to think about the working of the world as a whole. It is when you sit down and work through the models, that you realize how complicated the whole thing is and how naive intuition isn’t good enough. Of course models aren’t the only way to study, so one needs a mix of models and a non-mathematical narrative and some empirical analysis to add colour to the story. It is true models have disadvantages but beware of people who just highlight the disadvantages and don’t know the advantages because their intuition is also a naive model of the world.

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