This is an article from The Economist which discusses the validity of macroeconomic models. It focuses on the fact that not all economic agents are included in these theoretical models that have been used over the years, such as banks. This is worth taking into consideration because , like the macroeconomic indicators used to measure the performance of the national economy, each economic model has its strengths & weaknesses and if banks & other financial institutions are to be included in the model, it's highly likely for the accuracy and validity of these models to increase as more economic 'agents/participants' are encompassed into the theories being analyzed, giving more details about the bigger picture.
http://www.economist.com/news/finance-and-economics/21569752-efforts-are-under-way-improve-macroeconomic-models-new-model-army?zid=307&ah=5e80419d1bc9821ebe173f4f0f060a07
Good article. In order for greater economic stability and foresight, the increased accuracy of the economic models would be necessary. Might help economists identify indicators of troubled times.
ReplyDeleteAfter the economic crisis that was caused by the bursting of the housing bubble, surely as economists, we should have gone back to the drawing board. To exclude financial institutions from macroeconomic models after they singled handedly shocked the global economy seems a bit naive. It's like engineers choosing to ignore air resistance in flight simulation models - disaster would be imminent. Our disaster already happen, in 2008!
ReplyDeleteCompletely agree! From what I see, the unfortunate part of all this is the fact that if people, especially economists, are aware of this weakness in the theoretical understanding of economics, why hasn't a change been implemented already? I know it's easier said than done, but still...
ReplyDeleteI agree with Karn and Mainza that we really need to look back and find a way to improve and find ways to add to the financial institutions in our economic model as they would help in providing better forecasts. I think it would get a bit more complicated but i think it is worth it.
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