Wednesday, March 11, 2015

Send. More. Parameters.

Noah Smith, on Monday:
Modern macroeconomics is chock full of [dynamic] models. There are as many of them as there are grains of sand on a beach. You can have your pick, since macroeconomic data is typically too weak and uninformative to rule in favor of one or the other. Furthermore, each of these models has a number of parameters that represent how the economy responds to things. The range of parameter values used in models is enormous, since no one knows what the right model is in the first place.
Of course these uninformativeness of the data is directly related to the number of parameters used. The more parameters, the more uninformative the data will be. If the Standard Model of physics had 200 parameters instead of 20 or so, the data would have ruled out fewer competing models and physics would be in the same situation.

So the idea of whether macroeconomic data is powerful or not is dependent on how many parameters you think a macroeconomic model should have. Noah apparently thinks they should have a lot.

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