Inflation, Models & Tribal Cliques
Economics
Andy Haldane, the then Chief Economist at the Bank of England, and Arthur Turrell have documented the exceptional insularity of economics as a science.
Haldane
Turrell
One measure of this insularity is the fraction of papers from outside economics cited by economists, which is the lowest among all disciplines, although it has been growing in recent years. A 2006 survey provides further evidence: When asked whether “interdisciplinary knowledge is better than knowledge obtained by a single discipline,” nearly 60% of academic economists strongly disagreed. This contrasts with an average of 21% disagreement among practitioners in sociology, political science, psychology, finance, and history. This trend aligns with my experiences in economics, where, despite a general insularity, 40% have been quite welcoming.
See: interdisciplinary model for macroeconomics | Oxford Review of Economic Policy | Oxford Academic (oup.com)
Christine Lagarde, speaking bluntly at Davos last week, labeled economists – presumably referring to those at the ECB – as a “tribal clique.” She observed, “They are among the most tribal scientists. They quote each other, rarely venturing beyond their world, comfortable within it. Perhaps their models contribute to this.”
Maria Demertzis echoed Lagarde’s frustrations, critiquing the poor track record of economic forecasting: “The fact that inflation returns to [below 2%] in two years’ time is by construction. The models used force it to return to equilibrium.”
See: ‘A tribal clique’: Lagarde denounces economists at Davos – Euractiv
Indeed, the return to equilibrium in DSGE models is a built-in feature. In these models, nothing else can occur, barring an event as dramatic as a meteorite hitting Earth. I have often argued for alternative approaches, like Agent Based Models (ABM). While ABMs are not without flaws, they strive to depict the economy as it functions in reality, not as an idealized version based on rational agents and market equilibrium.
ABMs offer plausible scenarios for policymakers to consider. Our latest paper on post-COVID inflation, for instance, presents different scenarios for future inflation trends. Contrary to Central Banks’ baseline models, our ABM suggests that inflation may not settle quietly at 2%, but exhibit damped oscillatory behavior with potential resurgence down the line.
In conclusion, unlike the predictions of Central Bank models, “it ain’t over before it’s over.”
Written by Jean-Philippe Bouchaud : Top 10 Quants On Wall Street 2023 : Capital Fund Management Chairman : Académie des Sciences of the Institut de France Member
Inflation, Models & Tribal Cliques
