Wednesday, 10 August 2011

What ho Global Economics!

This post argues (again) that there is no way ahead for the global economy without theoretical innovation.

The trouble is that the wave of innovations that has been sparked by the 2008 meltdown, still assumes that the world economy is built from discernible building blocks: the national macro economies. There are brill new models that incorporate the national financial sectors into the monetary models. These will almost certainly help avoid a crisis triggered in the similar vein, but perhaps you could argue that any model that aims explain the crisis, also needs to go beyond the triggers and explain why policy did not work for such a long time (if at all). We are yet again in the dark about even the short term future of the global economy, and the finance upgraded new macro models do not give us much extra light.

True, we have increasingly sophisticated global financial network models (sometimes even combined with trade networks). These make important structural points about the global economy. However, so far, they have remained the tools of the banking regulators, without any spill over into macroecomomics proper.

Perhaps, the problem is not with modelling one sector (finance), but rather that in the old macro framework, we are trying to explain the behaviour of a system on an organisational level (national economies) that has long been outgrown by another level (global). Perhaps, the solution is a global economy level description. (Discloser: I have been riding this horse since 2007, but -- obviously -- without anyone noticing. Not that there was a chance for the latter now.) There are some immediate obstacles.

For one, although we have fantastic national level data, there is no truly global dataset. This is a bigger problem as it sounds, for some of the new dynamics are coming from emerging markets that do not publish (and often do not even have) the kind of data that would be needed for proper modelling.

Two, any macro, should it be national or global, assumes the presence of a policy maker. And that -- here I would agree -- indeed does not exist on the global level.

Neither of these is beyond amend.

It is embarrassingly obvious (and way too often repeated on this blog) that the first step towards a credible policy 'solution', recognised as such by the markets, is a global macro model with empowered global policy institutions. Just pretend that the different countries of the world are mere provinces of the all-encompassing global economy.

Off to work...

Pip pip!

(Links: return of the bear, and yet another piece of how blind the rating agencies are.)


  1. Regarding the economic melt down,I have a question,

    Does anyone think that we are going to EVER pay our debt off?
    It bugs me that the governments seem to think this is possible, I blogged about a great Idea to hit the reset button. It would be like bell curving the money owed so that it may be possible to pay off and restructuring the capitalism model so we don't find ourselves in this mess again.

    I look foward to the answeres and futher blog postings.

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