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Free Example of The Economist Essay

The Economist published both in its printed edition and online the article of January 19, 2013, entitled New model army as an attempt of analyzing existing macroeconomic models in the post-crisis period. The main idea of the article is that currently employed macroeconomic models are lacking and fail to represent the actual state of affairs in the financial world despite the fact that they have once been efficient and successfully deployed by the economists. Therefore, new macroeconomic models have to be developed or the existing ones should be considerably improved.

One of the ways to accomplish that is to “fix” numerous failings of standard models known as dynamic stochastic general equilibrium or DSGE models. In the economists’ viewpoint, these models do not represent the true state of the financial system and do not allow alteration in case of the booms and busts of the real world. In their traditional form, the DSGE models do not take into consideration the role of banks in the world financial system. Currently deployed models account only for a limited number of representative agents, but do not account for banks. However, banks play the pivotal role in the modern world and in the financial system. Therefore, new macroeconomic models should not only make banks an integral element of the model, but also allocate a central place for it, like some academics offer to do. Such a decision seems to be a logical and well-grounded one as there are no signs that banks are going to cease to be so influential in the nearest future. This idea has been forwarded, for instance, by Hyun Song Shin from Princeton University and John Geanakoplos from Yale.

The author of the article tends to agree with the idea that mainstream macroeconomic models have to represent the financial sector realistically. As a matter of fact, their huge disadvantage is that “they are inherently stable unless disturbed from the outside”. This feature imposes certain boundaries on the economists in their attempt to analyze the development of real life economies and how they react in the absence of external shocks. Banks are likely to generate internal shocks within the system, thus proving the necessity of their inclusion into new models.

Besides DSGE models, there exist also other macroeconomic models like agent-based ones. It is important to mention that the theory of these models appeared in the 1990-s and stemmed from various biological researches. Nonetheless, these models have become popular only recently as previously the idea of modeling the whole economy did not seem practical because of the vast quantity of various required calculations. Agent-based models allow for studying the reasons and unwinding of crisis and financial bubbles. Nowadays, one of the most elaborated and sophisticated agent-based models is the one of the EU’s economy generated by the EURACE project.

 No matter which way is chosen and what existing model serves as the underlying basis for a new one, the recent economic crises has proven that new efficient macroeconomic models have to be produced in order to reflect the real situation in the financial sector and to allow economists make accurate prognosis and justified decisions. Despite this necessity for improvement, staff economists seems to be reluctant to adopt new models as they are used to exploiting “industry-standard” models, though they have turned to be lacking. The European Central Bank is the likeliest central bank that will be willing to experiment and start using new macroeconomic models.

Those who advocate for new models suppose that the supporters of mainstream models will demonstrate resistance and will try to discredit their efforts aimed at innovation. However, it is a necessary step because old models are no longer valid in the contemporary economic world. They do not reflect the current financial situation and are dangerous in the times of crisis. Economists from all over the world should be willing to work together and join the movement of developing new models or significantly improving the existing ones. Economic crisis affects millions of people and all aspects of business in different countries of the world. Lastly, the economists and business sectors have to be ready to predict and tackle future financial crisis if they cannot be averted in order not to endanger national economies of all countries.

Code: Sample20

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