#economicmodelling

This is where we have interesting results. So the problem statement is where to get the laundry done. Options are to get the hotel to do it, pop around to the local mall laundry people, the neighbourhood laundry or do it yourself. I included the time value as well. There’s also many more factors (quality, reliability, packaging, etc) but this should suffice to show that even after modelling all this, I simply cannot be arsed to wash and iron my clothes but the cash element always wins out #laundry #decisionmaking #economicmodelling #cantbearsed (at Abu Dhabi, United Arab Emirates) https://www.instagram.com/p/BsfxmylgkDI/?utm_source=ig_tumblr_share&igshid=4slky3aacy8l

"The purpose of the original RBC models was not necessarily to argue that these models represented an accurate portrayal of the business cycle, but rather to see how much of the business cycle could be explained without the appeal to frictions. The basic idea is that there could be shocks to tastes and/or technology and that these changes could cause fluctuations in economic activity. Furthermore, since the RBC model was a frictionless model, any such fluctuations would be efficient. This conclusion was important. We typically think of recessions as being inefficient and costly. If this is true, countercyclical policy could be welfare-increasing. However, if the world can be adequately explained by the RBC model, then economic fluctuations represent efficient responses to unexpected changes in tastes and technology. [..] The idea behind the real business cycle model is that fluctuations in aggregate productivity are the cause of economic fluctuations. If all firms are identical, then any decline in aggregate productivity must be a decline in the productivity of all the individual firms. But why would firms become less productive? [..] Suppose that you have a bunch of different firms producing different goods and these firms have different levels of productivity. In this case, an aggregate productivity shock is simply the reallocation from high productivity firms to low productivity firms or vice versa. [..] the RBC model essentially suggests that fluctuations in the economy are driven by the reallocation of inputs between firms with different levels of productivity [..] What are the sources of reallocation? For example, if the reallocation is due to changes in demographics and/or preferences, then these reallocations could be interpreted as efficient responses to structural changes in the economy and be seen as efficient. However, if these reallocations are caused by changes in relative prices due to, say, monetary policy, then the welfare and policy implications are much different. [..] what we should do is try to disaggregate productivity, determine what causes reallocation, and try to assess whether this is an efficient reallocation or should really be considered misallocation."

"Romer’s most effective rhetorical strategy is to point out that the RBC core of modern DSGE models posit unobservable taste and technology shocks to account for fluctuations in the economic time series, but that these taste and technology shocks are themselves simply inferred from the fluctuations in the times series data, so that the entire structure of modern macroeconometrics is little more than an elaborate and sophisticated exercise in question-begging. [..] When confronted by evidence that the predictions of their models are wrong, the standard and almost comically self-confident response of the modern macroeconomists is: All models are false. By which the modern macroeconomists apparently mean something like: “And if they are all false anyway, you can’t hold us accountable, because any model can be proven wrong. What really matters is that our models, being microfounded, are not subject to the Lucas Critique, and since all other models than ours are not micro-founded, and therefore being subject to the Lucas Critique, they are simply unworthy of consideration. [..] It is also simply not true, because the Lucas Critique applies even to micro-founded models, because those models are strictly valid in equilibrium settings and do not predict the adjustment of economies in the transition between equilibrium states. All models are subject to the Lucas Critique. [..] following William of Occam he should seek an economical description of natural phenomena. Just as the ability to devise simple but evocative models is the signature of the great scientist so overelaboration and overparameterization is often the mark of mediocrity. Since all models are wrong the scientist must be alert to what is importantly wrong. It is inappropriate to be concerned about mice when there are tigers abroad. [..] Pure mathematics is concerned with propositions like “given that A is true, does B necessarily follow?” Since the statement is a conditional one, it has nothing whatsoever to do with the truth of A nor of the consequences B in relation to real life. [..] In applying mathematics to subjects such as physics or statistics we make tentative assumptions about the real world which we know are false but which we believe may be useful nonetheless."