Jason Smith — What do equations mean?

Jason Smith comments on J. W. Mason and Arun Jayadev on MMT and conventional economics from the point of view of scientific modeling in macro.

Information Transfer Economics
What do equations mean?
Jason Smith

Brian Romanchuk — The Curious Notation Of DSGE Models

This article is an appendix to my earlier articles on dynamic stochastic general equilibrium (DSGE) model accounting (here and here). The problem with my understanding of DSGE appears to be that I assumed that the DSGE modellers were using mathematical notation in a standard fashion. I now realise that the secret sauce to DSGE modelling is a blatant disregard to mathematical notation. I had pointed out that I was missing something; my assumption that there were some super important theorems from microeconomics that everyone was invoking, but not formally specifying. Instead, the answer is much simpler: the notation used was misleading, if not outright incorrect.

(I have been hit with a number of projects recently -- including a MMT presentation at Concordia University last night. As a result, this article is relatively brief and tentative. I will return to a more meatier conclusions when I discuss the treatment of the governmental sector. Note that my earlier articles hinted at what I discuss here, but I had not gone to far in formalising this. The formalisation is a key step; if the notation is wrong, the only way to deal with the problem is to fix the notation.)…

Bond Economics
The Curious Notation Of DSGE Models
Brian Romanchuk

Brian Romanchuk — The Curious Household Accounting Of DSGE Models [part 2 of 3]

This article is the second part (of a planned trilogy) of articles on the accounting issues within Dynamic Stochastic General Equilibrium (DSGE) models. I have deliberately chosen one of the simplest DSGE models I could find, a deterministic (non-random) Ramsey model from the text Recursive Macroeconomic Theory by Lars Ljungqvist and Thomas J. Sargent. I have the third edition; the text is referred to as [LS2012] herein. My previous article, "The Curious Profit Accounting of DSGE Models," described the relationships for the business sector. This model has three sectors, and yes, the third article will likely be titled "The Curious Government Accounting of DSGE Models." That is, I see issues with all three sectors; the macroeconomic accounting identities tell us if we have a problem with one sector, this will rebound to the other sectors....

Bond Economics
The Curious Household Accounting Of DSGE Models
Brian Romanchuk

Brian Romanchuk — The Curious Profit Accounting Of DSGE Models

One of the more puzzling aspects of neo-classical economic theory is the assertion that profits are zero in equilibrium under the conditions that are assumed for many models. One should re-interpret this statement as "excess profits" are zero, but there are still some awkward aspects to the treatment of profits in standard macro models. This article works through the theory of profits for an example dynamic stochastic general equilibrium (DSGE) model, and discusses the difficulties with the mathematical formulation.

The example is taken from Chapter 16 ("Optimal Taxation With Commitment") in the textbook Recursive Macroeconomic Theory, by Lars Ljungqvist and Thomas J. Sargent (I have the third edition). For brevity, the text will be abbreviated as [LS2012] herein. If the reader is mathematically trained and wishes to delve into DSGE models, this textbook is the best place to start. The mathematics is closer to the original optimal control theory that DSGE macro is based upon, whereas other treatments follow the mathematical standards of academic economics, the difficulties with which are discussed later in this article....

Bond Economics
The Curious Profit Accounting Of DSGE Models
 Brian Romanchuk

Se also

Lars P. Syll’s Blog
Ricardian equivalence — nothing but total horseshit!
Lars P. Syll | Professor, Malmo University

Lars P. Syll — The DSGE quarrel

Quote by Silvia Merler/Bruegel mentioning Lars, with a shoutout to Brian Romanchuk.

Lars P. Syll’s Blog
The DSGE quarrel
Lars P. Syll | Professor, Malmo University

More from Lars

Economic history — a victim of economics imperialism

Empirical economics and statistical power

The Arthurian — Grab a Barf Bag!

Here's a quote that would make Lars Syll retch:

Because DSGE models start from microeconomic principles of constrained decision-making, rather than relying on historical correlations, they are more difficult to solve and analyze. However, because they are also based on the preferences of economic agents, DSGE models offer a natural benchmark for evaluating the effects of policy change.- MathWorks: Modeling the United States Economy

"... based on the preferences of economic agents, DSGE models offer a natural benchmark for evaluating the effects of policy change.

I think this is one of Syll's pet peeves! DSGE models are not "based on the preferences of" actual economic agents, but on simplified agents arising from "deductivist" assumptions....

The is a good illustration of "mindless math" aka GIGO. Mindless math presumes (hidden assumption) that quantification somehow guarantees outcomes regardless of conceptual logic that underlies the numbers.

For example, variables have arguments based on the conceptual definition of the variable in terms of a set. If the numbers do not match the defined membership of the set, then GIGO. This is all over the place in economic modeling, e.g., where homogeneity is assumed excessively, or where micro is extended to macro when the fallacy of composition applies.

Lars Syll assiduously points out these "freshman errors" in his blog. More economists should be paying attention.

I find it rather surprising that MathWorks would stumble over this.

The New Arthurian Economics

Grab a Barf Bag!

The Arthurian

Brian Romanchuk — How Not To Defend DSGE Macro

As an outsider, one can only revise down one's opinion of the academic standards of mainstream economists. We have an intellectual debate in which one side refuses to admit the existence of the debate in the first place. I am not an expert on the scientific method, but it seems to me that is not how it is supposed to work.

Bond Economics 

How Not To Defend DSGE Macro

Brian Romanchuk

Tim Wallace — Inflation is getting harder to understand, central banker warns

No, inflation is not getting harder to "understand." Central banks are just using models that don't fit the case, for example, confusing special case model with general models, or using models that are mis-specified. 

The message is to review the assumptions, including methodological ones, and revise them as appropriate. Then compare the model with the real world.

What's so difficult to understand about that? This is what scientists do.

Difficult, you say? That's what you are getting paid for. If you don't have the chops, then resign and do something you can handle. 

Maybe others have a better handle on it. Give them a shot.

The Telegraph
Inflation is getting harder to understand, central banker warns

Tim Wallace

Brian Romanchuk — DSGE Wars (Again)

Although this sounds extremely harsh, it is the only way to describe aspects of DSGE macro such as the assumption that the level of interest rates is a key determinant of economic behaviour. In practice, this assumption is built into all mainstream models, and the empirical methodologies have no way of rejecting the assumption. It is not entirely an accident that the consensus has been shocked by the slow pace of recovery after modern recessions -- after all, it was believed that the level of interest rates was "unsustainably low." Indeed, the natural rate of interest had to be revised lower in order for the data to fit the theory.

In other words, the whole panoply of mathematics used is a gigantic red herring.

From the perspective of wanting to understand how the economy functions, there is only one real question: are the desired theoretical outcomes of DSGE macro practitioners useful? The fact that DSGE macro is roundly ignored by everyone whose job depends upon being right about the economy is probably the best answer to that question. (In theory, central bankers are supposed to care about being right about the economy, but in practice, even the raw incompetence displayed heading into 2007 did not cut into retired senior central bankers' subsequent speaking fees.)

From the perspective of academic economics, it is an obvious problem that this methodology has to be used in the "top journals." This is only a surprise if you assume that the academic system shows a tendency to progress towards the truth.…

Fitting the world to a model doesn't work so well.

The key criticsm from the POV of logical analysis and philosophy of science is this:

In Section 7.3, recursive competitive equilibrium is defined. It starts with a lot of mathematics, but even then, some economist hand-waving sneaks into the definition. They use terms that do not appear to correspond to standard mathematical concepts, and hope the reader knows what they mean. Mathematics largely consists of statements about sets and the property of sets; it is unclear what set properties they are describing at key sections of their definition.

Math may look impressive but it says nothing that is not contained in the stipulations — definitions and axioms that relate them. In represesntational models these stipulation establish the semantic connection with the "world" that the model purports to represent. That world provides the objective criteria for assessing the how representative a model actually is in application.

Problems at this foundational level result in GIGO. There is no room for lack of specificty in mathematical reasoning.

Bond Economics
DSGE Wars (Again)
Brian Romanchuk

Lars P. Syll — Stiglitz and the full force of Sonnenschein-Mantel-Debreu

Just why is anyone still going to these people for policy advice, let alone putting some of them in charge of setting policy?

The power of elite discourse to persuade is dangerous when an elite controls the frame and there is no accountability for results.

Lars P. Syll’s Blog

Stiglitz and the full force of Sonnenschein-Mantel-Debreu

Lars P. Syll | Professor, Malmo University

Bill Mitchell — Falling enrolments in mainstream economics programs is a desirable outcome

If you have had the misfortune to study economics formally at university then you will recall sitting through endless and tedious lectures where the instructor asserted some superior knowledge about psychology and human behaviour. If you had combined the economics study with studies in psychology and sociology, you would have soon realised that what was being taught in your economics course was total nonsense. There was an article in the Fairfax press recently (August 6, 2017) – Crisis in high school economics a threat to national wellbeing – ruing the declining enrolments in secondary school economics programs. The point is that these courses are typically more damaging than useful and the contention of the journalist that we are reducing the quality of the economic debate as a result of less people studying economics is problematic. The typical economics program is simple indoctrination into a set of neoliberal principles that allow poor policy to continue despite it delivering disastrous outcomes. There is a crying need for more economic and financial literacy, but that requires an entirely different approach to be adopted rather than jamming more kids into the existing courses and having them come out dangerously brain dead....

Bill Mitchell – billy blog
Falling enrolments in mainstream economics programs is a desirable outcome
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

Brian Romanchuk — Science And Economics

I had largely managed to avoid writing about the latest angst in the economics blogosphere regarding mathematics, science, and economics. I am not a fan of mainstream economics, but at the same time, I question some of the broad brush attacks on economics. The quest to pretend that economics can be a science like physics is doomed, and does not take into account the nature of what is being studied.

Bond Economics
Science And Economics
Brian Romanchuk

Brian Romanchuk — Labour Market Tightness Confusion

This article discusses a few topics that have struck my interest in recent days. Unfortunately, discussions of theory are back. I am starting to pursue a collaboration with Alexander Douglas (an academic philosopher), as we wish to write an article about Dynamic Stochastic General Equilibrium (DSGE) models from a philosophy of science perspective. As a result, I feel somewhat like I am trapped in a parody of The Godfather, Part III, being pulled back in to discuss DSGE macro. Although I want to otherwise avoid being bogged down in theory, the belief that we can discuss the empirical data without reference to theory in this case is just wishful thinking....

Bond Economics
Labour Market Tightness Confusion
Brian Romanchuk

John Muellbauer — Macroeconomics and consumption: Why central bank models failed and how to repair them

Good analysis of why central bank models fall short based on overly restrictive assumptions and failure to include key factors in the parameters. So the parameters that are identified are miscast and important parameters are ignored, notably the role of credit as a financial accelerator. 

vox.eu

Macroeconomics and consumption: Why central bank models failed and how to repair them
John Muellbauer | Senior Research Fellow, Nuffield College; Professor of Economics, Oxford University; and Senior Fellow, Institute for New Economic Thinking, Oxford Martin School

Liberty Street — The FRBNY DSGE Model Forecast—November 2016

This post presents the latest update of the economic forecasts generated by the Federal Reserve Bank of New York’s (FRBNY) dynamic stochastic general equilibrium (DSGE) model. We introduced this model in a series of blog posts in September 2014 and have since published forecasts twice a year. Here we describe our current forecast and highlight how it has changed since May 2016.

As usual, we remind our readers that the DSGE model forecast is not an official New York Fed forecast, but only an input to the Research staff’s overall forecasting process.…

FRBNY — Liberty Street Economics
The FRBNY DSGE Model Forecast—November 2016Marco Del Negro, Marc Giannoni, Abhi Gupta, Pearl Li, and Erica Moszkowski

Simon Wren-Lewis — Stock-Flow Consistent models: response to Jo Michell

Jo has a thoughtful and constructive response to my post discussing a recent Bank of England paperthat presents a new Stock-Flow Consistent (SFC) model. One of the reasons it is constructive is because it is not tribal: too many followers of heterodox schools seem to just want to rubbish mainstream macro and suggest their particular school represents the new dawn. So I thought I might make a few points on Jo’s post that might be helpful.

Mainly Macro
Stock-Flow Consistent models: response to Jo Michell
Simon Wren-Lewis | Professor of Economics, Oxford University

Jo Mitchell — Consistent Modelling And Inconsistent Terminology

Detailed comment on the points raised by Simon Wren-Lewis on SFC modeling versus DSGE modeling. Lots of history.

Critical Macro Finance

Consistent Modelling And Inconsistent Terminology

Jo Mitchell | Senior Lecturer, University of the West of England, Bristol

ht Ramanan at The Case for Concerted Action

Brian Romanchuk — SFC vs. DSGE (Again)

There was a recent set of articles discussing Stock-Flow Consistent (SFC) and Dynamic Stochastic General Equilibrium (DSGE) models; an initial article by Simon Wren-Lewis (link), which led to responses by others; I would recommend these two articles (link and link) by Ramanan.

The discussion was civil, which is partially the result that Simon Wren-Lewis agrees that the fixation on "microfoundations" makes very little sense. However, since it is still insisted upon by mainstream academics as being necessary to get published in mainstream journals, his flexibility is not particularly representative.…

Brian also explains the writing projects he is working on.

Bond Economics
SFC vs. DSGE (Again)
Brian Romanchuk

Andrew Lainton — Why SFC models are based on Better Theory – a Response to Simon Wren Lewis

Criticism is an opportunity to respond and clarify.

Decisions, Decisions, Decisions
Why SFC models are based on Better Theory – a Response to Simon Wren Lewis
Andrew Lainton

Brian Romanchuk — Ending The "Neo-Fisherian" Debate

One of the stranger spectacles of mainstream macro is the inability to agree on what should be obvious -- will inflation rise or fall if the central bank raises the (nominal) interest rate? If it were possible to cleanly find the solutions for Dynamic Stochastic General Equilibrium (DSGE) models, this could easily be determined by applying a level shift to a sensible central bank reaction function (such as a Taylor Rule).
(As many of my readers are post-Keynesian, I will note that this article follows the convention of mainstream economics, and ignore the insights of post-Keynesian analysis. As a result, I am just writing here about the analysis of DSGE models, and not how economies in the real world might operate.)

If this can't be decided empirically in a compelling way using the operative models, the entire debate is pretty clearly bonkers.

Bond Economics
Ending The "Neo-Fisherian" Debate
Brian Romanchuk