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1. Why Diagnostic Expectations Cannot Replace REH

Author:
Roman Frydman and Halina Frydman
Publication Date:
01-2022
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
Gennaioli and Shleifer (GS) have proposed diagnostic expectations (DE) as an empirically-based approach to specifying participants’ expectations, which, like REH, can be applied in every model. Beyond its supposedly general applicability, GS’s formalization of DE implies that participants systematically and predictably overreact to news. Here, we present a formal argument that Kahneman and Tversky’s compelling empirical findings, and those of other behavioral economists, do not provide a basis for a general approach to specifying participants’ “predictable errors.” We also show that the overreaction of participants’ expectations is not a regularity, but rather an artifact of GS’s particular specification of DE.
Topic:
Economics, Models, and Predictability
Political Geography:
Global Focus

2. Why Diagnostic Expectations Cannot Replace REH

Author:
Roman Frydman and Halina Frydman
Publication Date:
01-2022
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
Gennaioli and Shleifer (GS) have proposed diagnostic expectations (DE) as an empirically-based approach to specifying participants’ expectations, which, like REH, can be applied in every model. Beyond its supposedly general applicability, GS’s formalization of DE implies that participants systematically and predictably overreact to news. Here, we present a formal argument that Kahneman and Tversky’s compelling empirical findings, and those of other behavioral economists, do not provide a basis for a general approach to specifying participants’ “predictable errors.” We also show that the overreaction of participants’ expectations is not a regularity, but rather an artifact of GS’s particular specification of DE.
Topic:
Economics, Academia, and Models
Political Geography:
Global Focus

3. Tracing the evolution of service robotics: Insights from a topic modeling approach

Author:
Ingrid Ott, Ivan Savin, and Chris Konop
Publication Date:
01-2021
Content Type:
Working Paper
Institution:
Kiel Institute for the World Economy (IfW)
Abstract:
Taking robotic patents between 1977 and 2017 and building upon the topic modeling technique, we extract their latent topics, analyze how important these topics are over time, and how they are related to each other looking at how often they are recombined in the same patents. This allows us to differentiate between more and less important technological trends in robotics based on their stage of diffusion and position in the space of knowledge, where some topics appear isolated while others are highly interconnected. Furthermore, we propose a novel approach to match the constructed topics to the IFR classification of service robots based on frequency and exclusivity of words overlapping between them. We identify around 20 topics belonging to service robotics. Our results corroborate earlier findings, but also provide novel insights on the content and stage of development of application areas in service robotics. With this study we contribute to a better understanding of the highly dynamic field of robotics and contribute to new practices of utilizing the topic modeling approach.
Topic:
International Political Economy, Science and Technology, Robotics, and Models
Political Geography:
Global Focus

4. Cordon of Conformity: Why DSGE models Are Not the Future of Macroeconomics

Author:
Servaas Storm
Publication Date:
02-2021
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
The Rebuilding Macroeconomic Theory Project, led by David Vines and Samuel Wills (2020), is an important, albeit long overdue, initiative to rethink a failing mainstream macroeconomics. Professors Vines and Wills, who must be congratulated for stepping up to the challenge of trying to make mainstream macroeconomics relevant again, call for a new multiple-equilibrium and diverse (MEADE) paradigm for macroeconomics. Their idea is to start with simple models, ideally two-dimensional sketches, that explain mechanisms that can cause multiple equilibria. These mechanisms should then be incorporated into larger DSGE models in a new, multiple-equilibrium synthesis – to see how the fundamental pieces of the economy fit together, subject to it being ‘properly micro-founded’. This paper argues that the MEADE paradigm is bound to fail, because it maintains the DSGE model as the unifying framework at the center of macroeconomic analysis. The paper reviews 10 fundamental weaknesses inherent in DSGE models which make these models irreparably useless for macroeconomic policy analysis. Mainstream macroeconomics must put DSGE models, once and for all, in the Museum of Implausible Economic Models – and learn important lessons from non-DSGE macroeconomic approaches.
Topic:
Economics, Economic Growth, Macroeconomics, Money, Demand, and Models
Political Geography:
Global Focus

5. Asset Prices Under Knightian Uncertainty

Author:
Roman Frydman, Søren Johansen, Anders Rahbek, and Morten Tabor
Publication Date:
12-2021
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
We extend Lucas’s classic asset-price model by opening the stochastic process driving dividends to Knightian uncertainty arising from unforeseeable change. Implementing Muth’s hypothesis, we represent participants’ expectations as being consistent with our model’s predictions and formalize their ambiguity- averse decisions with maximization of intertemporal multiple-priors utility. We characterize the asset-price function with a stochastic Euler equation and derive a novel prediction that the relationship between prices and dividends undergoes unforeseeable change. Our approach accords participants’ expectations, driven by both fundamental and psychological factors, an autonomous role in driving the asset price over time, without presuming that participants are irrational.
Topic:
Economics, Models, and Price
Political Geography:
Global Focus

6. Are Current Models of Data Protection Fit for Purpose? Understanding the Consequences for Economic Development

Author:
Michael Pisa and Ugonma Nwankwo
Publication Date:
08-2021
Content Type:
Policy Brief
Institution:
Center for Global Development (CGD)
Abstract:
This brief is based on a roundtable hosted by CGD as part of the Governing Data for Development project, which explores how governments can use data to support innovation, development, and inclusive growth while protecting citizens and communities against harm.
Topic:
Development, Economics, Privacy, and Models
Political Geography:
Global Focus

7. Simultaneous estimation and modeling of nonlinear, non- Gaussian state-space systems

Author:
Josiah Steckenrider and Furukawa Tomonari
Publication Date:
07-2021
Content Type:
Research Paper
Institution:
Department of Social Sciences at West Point, United States Military Academy
Abstract:
This paper presents a framework for simultaneous estimation and modeling of nonlinear, non-Gaussian state-space systems. In the proposed approach, uncertainty in motion model parameters is incorporated to avoid overconfidence in state prediction and better account for modeling inaccuracies. The additional original contribution of a model correction stage improves nonlinear model parameter estimates in order to enhance the accuracy of state estimation. The presented nonlinear/non-Gaussian Simultaneous Estimation And Modeling (SEAM) approach was compared with contemporary estimation techniques using a Monte-Carlo simulation study. This study showed that the proposed method successfully reduces estimation error relative to existing approaches even when substantial model parameter uncertainty and multi-modal sensor noise are present. The framework has potential use in a wide range of applications where state-space estimation is employed, including robotics, signal processing, and controls.
Topic:
Science and Technology, Space, Artificial Intelligence, and Models
Political Geography:
Global Focus

8. Modeling and Simulation as a Bridge to Advance Practical and Theoretical Insights About Forced Migration Studies

Author:
Erika Frydenlund
Publication Date:
11-2021
Content Type:
Journal Article
Journal:
Journal on Migration and Human Security
Institution:
Center for Migration Studies of New York
Abstract:
Modeling and Simulation (M&S) is a relatively unused research approach in forced migration studies. In most of its application areas, M&S is applied in several broad thematic policy-oriented topics: predicting human movement, humanitarian logistics, communicable diseases, healthcare, policing, and economics. More recently, there has been increased use of M&S in predicting human movement and health impacts resulting from climate change. Computer modeling has benefits for both policy and theoretical advancements in the field. M&S is often associated as a predictive tool that appeals to policymakers and planners. But M&S has many other significant benefits. For policymakers and planners, M&S provides a simulated environment to explore “what-if” scenarios. These scenarios can be adjusted to reflect different assumptions and conditions in the field. M&S can provide a means for translating interpretivist research findings—themselves rich in descriptions of actors, relationships, and dynamics—into visual artifacts that can communicate results to policymakers. It also can help to test the assumptions of theoretical findings, explore generalizability to other cases and conditions, and inform future data collection efforts. On the other hand, because models can take a long time to construct and test, they cannot provide rapid insights about evolving situations to inform decision-making at the onset of a new emergency. Data dashboards, the staple of modern humanitarian operations, are better for identifying emergent needs and tracking efforts. However, modeling what we know from one situation allows us to use those insights in systematic and strategic ways to improve operations for the future. M&S can also provide researchers with an additional tool that allows improved integration of multiple data types and sources. These data, assumptions, and theoretical constructs can be linked together in a complex, nonlinear, dynamic system that can then be set in motion to see if the simulated world reveals phenomena that are witnessed in the real world. But interdisciplinary communication and collaboration is hard and finding modelers who value interpretivist research can be even harder. M&S is not a silver bullet but provides a unique approach that incorporates dynamics and is becoming increasingly accessible to policymakers, practitioners, and academics, including those without computer programing experience. For policy, it is important to invest the time and resources to develop simulation models—from simple to complex—that help when planning for the evolution of events, or for the next event. Models of current refugee situations should inform where to concentrate efforts to advance durable solutions and how to plan for potential scenarios of return to countries of origin. Policymakers must recognize the long-term value of modeling what we know now to use later. Researchers of migration should become familiar with M&S paradigms so they can become part of the model design, development, and testing phases—at least part of the conversation. Better integration of migration scholars in design and development has the potential to strengthen models for policymaking, but perhaps more importantly, to strengthen the field by serving as an extra tool for testing theories, assumptions, and generalizability of findings to other locations and situations.
Topic:
Migration, Models, Forced Migration, and Simulation
Political Geography:
Global Focus

9. Civil War Violence and Refugee Outflows

Author:
Andrew Shaver
Publication Date:
04-2021
Content Type:
Working Paper
Institution:
Empirical Studies of Conflict Project (ESOC)
Abstract:
Conflict forces millions of individuals from their homes each year. Using a simple structural model and new refugee data, we produce the first set of estimates relating outflows to annual conflict magnitudes. The theory underlying the structural model implies that standard panel data approaches will underestimate the impact of conflict violence, by differencing out the effect of prior and expected levels of violence on the decisions to flee. We estimate that whereas a shock that doubles conflict deaths in one year increases outflows in that year by 40% on average, doubling conflict deaths in all years increases annual outflows by 100%. We further estimate an average of 30 refugees per conflict death (median 18), with higher rates for conflicts closer to an OECD country and possibly for ethnic wars and in lower income countries. The analysis illustrates a broader methodological point: It can be hazardous to try to identify a causal effect using shocks to a presumed causal factor if the outcome variable is the result of decisions based not only on shocks but also on levels.
Topic:
Political Violence, Civil War, Refugee Issues, Refugees, Refugee Crisis, Data, Armed Conflict, and Models
Political Geography:
Global Focus

10. GARCH Analyses of Risk and Uncertainty in the Theories of the Interest Rate of Keynes and Kalecki

Author:
Hubert Gabrisch
Publication Date:
01-2021
Content Type:
Working Paper
Institution:
The Vienna Institute for International Economic Studies (WIIW)
Abstract:
This study attempts to identify uncertainty in the long-term rate of interest based on the controversial interest rate theories of Keynes and Kalecki. While Keynes stated that the future of the rate of interest is uncertain because it is numerically incalculable, Kalecki was convinced that it could be predicted. The theories are empirically tested using a reduced-form GARCH-in-mean model assigned to six globally leading financial markets. The obtained results support Keynes’s theory – the long-term rate of interest is a nonergodic financial phenomenon. Analyses of the relation between the interest rate and macroeconomic variables without interest uncertainty are thus seriously incomplete.
Topic:
Economics, International Political Economy, Economic Theory, Interest Rates, Macroeconomics, Keynes, Models, and Michał Kalecki
Political Geography:
Global Focus