This week we had a lecture from some representatives from Sweden’s Central bank.
This was very informative and gave me a better insight into the objectives and rational of a central government bank. This peak at some of the workings behind the projects and models for the Swedish economy was useful.
They explained why they use models in economics even though by their own admission they are oversimplified. As there needs to be some process for measuring future trends and it can allow you to isolate certain variables to a certain extent. They explained the dominance of the DSGE (Dynamic, Stochastic, General Equilibrium) model in Marco-Economics and described how and why it is still used even after the financial crisis of 2008. They mention how it is often the case that economic articles are outside the norm if they do not include a DSGE model and therefore may not get published and it may be difficult for the author to find work.
They explained their reliance on the rate of inflation as a measure for the economy now and future stability, explaining that data updates on inflation are most regular and therefore one of the best indicators to go for. They also highlighted that it is not so significant as to what the percentage of inflation is but rather that they attempt to keep it stable for a long period of time as one of the key roles of the Swedish central bank is economic stability.
And it is here where there is an all too familiar warning sign for me as any industry that continues to try and maintain the status quo and stability for long periods by using the models that it is used to using in the past is walking a fine line. As the world is changing at an seemingly ever faster rate, globalisation takes more and more precedence which they state has a big impact on the Swedish economy. It seems rather scary to me that one of the main ways to counter act this change is to use a model which they themselves state is oversimplified.
Part of this course in global economy at CEMUS is set out to question established traditions in economics and it seems to me that many economists and to a larger extent banks and governments in general are stuck in a habit of using models that are no longer fit for purpose and are very reluctant to change. That to me seems highly problematic and I think the clear narrow mindedness to ignore some of the warning signs for the 2008 financial crisis highlights the dangers of such an approach.
But that is just me, what do I know about economics?
Thanks for reading,