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Macroeconomics From the Bottom Up

In 2006, the Fed asked its macroeconometric model what would happen if house prices dropped by 20%. The model projected the past into the future and said: "Not much." Well, the financial crisis proved it wrong. Meanwhile, DSGE models, the main alternative up to this date, do not feature financial institutions; "They are not even good enough to be wrong," says Doyne Farmer. That's why Farmer and his team are developing an agent-based model, of the housing market first and of the entire economy next, to mimic the current financial crisis. The team collects data on actual people to calibrate a rich model with millions of interacting agents. This is a bottom-up approach to macroeconomics -- this is new economic thinking.

Institution
Institute for New Economic Thinking (Oxford University)
Country
UK
Author
Doyne Farmer
Topics
Economics, Agent-Based Modeling, Finance, Modeling
URL
https://www.youtube.com/watch?v=wC9dCSYAjFs