March 17, 2016

The End of Equilibrium Economics?

Visiting Fellow, Sanjeev Sanyal, in this ET article, says that "a complex world cannot be managed by increasing complexity but through simplicity and flexibility. Since there is no equilibrium, it’s all about triggering virtuous cycles and then managing the distortions that necessarily accompany them".


"Most conventional frameworks from Keynesian to Monetarist tend to think of economies as Victorian steam engines where an optimal ‘equilibrium’ can be attained by pulling the right levers and pulleys, and shovelling more coal into the furnace.This line of thinking inevitably manifests itself in large-scale Computable General Equilibrium (CGE) models. Almost all policymaking institutions spend enormous resources building them. This is inexplicable given that CGE models have never been able to predict a major economic event. The problem is that economies are not Victorian machines and no amount of refining the CGE framework will get us better results."

"First of all, let us be clear that there is no such thing as an ‘equilibrium’ growth rate to which the world economy naturally gravitates. Similarly, all periods of economic growth in history have been accompanied by large global imbalances. A return to so-called balance is not obviously a good thing. There is also no ‘neutral’ interest rate to which the US Federal Reserve need revert. So, the Fed should act on the best available data and not be swayed by some preconceived notion of normality."

"The imposition of increasingly cumbersome rules is making financial systems inflexible and less transparent. The CAS approach would suggest that this makes the banking system more vulnerable, not less. Indeed, the new complicated Basel-related regulations are likely to have unintended consequences that may cause the next crisis. It’s better to have simple regulations combined with active supervision. Policymakers must realise that regulation and supervision are different things, and there is a trade-off between them."

Topic : State Capacity / In : OP-EDS
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