10th Tinbergen Institute Conference: Complexity in Economics and Finance

Introduction

The last couple of decades economic teaching and research has moved the field of economics into a single standardized paradigm of rational, self-interested, mostly identical agents, whose behavior is analyzed in equilibrium. While this has fostered communication between economists and led to a surge in our understanding of economic and financial markets, the financial crisis of 2007 and 2008 showed that this analytical approach does not form a panacea to all our economic problems. As Trichet put it, during the financial crisis, central bankers and policy makers “felt abandoned by conventional tools”, as the standard approach was neither unable to foresee nor prepared to handle a crisis of this magnitude. It seems that the standard economic approach is ill-suited to handle situations characterized by sudden transitions, crises, or cascading effects.

But what is the alternative? Luckily, while economists moved into a paradigm of static equilibrium behavior of homogeneous agents, other fields, such as physics, biology, ecology and mathematics, have moved into the opposite direction. A new encompassing approach has developed in order to analyze dynamic systems with heterogeneous interacting components, which are characterized by chaotic behavior, networks, sudden regime shifts, cascades and extreme events. This is the complex systems approach. In this approach agents are heterogeneous and boundedly rational. The complex systems view fits very well with behavioral models of macroeconomics and finance.

Can this complex systems approach be applied to economics and finance as well, and lead to new insights and better economic models and tools? Some applied physicists, mathematicians and economists believe it can, and they increasingly receive the support from economic and financial policy makers. It is time that PhD students, professors, researchers and policy makers in economics and finance become aware of this new approach, and learn how to use these tools in their own work.

Objective

The objective of the conference was:

1. to introduce a broad economic public to the complex systems approach, in particular applied to macroeconomic and financial systems;
2. to increase understanding and foster collaboration between the different sciences in the analysis of economics and finance.

Format

The general topics of the three days were:

Day 1: Financial and Economic Crises
Day 2: Financial and Economic Networks
Day 3: The Economy as a Complex System

Presentations

In alphabetical order:

Bouchaud, Jean-Philippe (CFM and École Polytechnique)
Tipping points and crises in simple macroeconomic models

Cont, Rama (Imperial College London)
Endogenous risk and price-mediated contagion: modeling, monitoring and regulation

Dawid, Herbert (Bielefeld University)
Cohesion Policy and Inequality Dynamics: Insights from a Heterogeneous Agents Macroeconomic Model

Delli Gatti, Domenico (Università Cattolica del Sacro Cuore)
Policy experiments in a macroeconomic agent based model with capital and credit

Diks, Cees (University of Amsterdam)
Critical Slowing Down as Early Warning Signals for Financial Crises?

Farmer, Doyne (Oxford University)
Evaluating macroprudential policies in a dynamical model of the Basel leverage cycle

Georg, Co-Pierre (University of Cape Town and Bundesbank)
A Network View on Interbank Market Freezes

Goyal, Sanjeev (University of Cambridge)
Financial Linkages, Risk taking and Welfare

LeBaron, Blake (Brandeis University, United States)
Internal learning mechanisms and the generation of complex economic time series

Leij, Marco van der (University of Amsterdam)
The formation of a core periphery structure in heterogeneous financial networks

Mantegna, Rosario Nunzio (Central European University)
Detecting hierarchical structures and networked relationships in complex systems systems

May, Robert M. (Oxford University)
Systemic Risk in Ecological and Financial Systems: Early Warnings?

Menkveld, Albert J. (VU University Amsterdam)
Crowded Trades: An Overlooked Systemic Risk for Central Clearing Counterpart

Pietronero, Luciano (University of Rome “La Sapienza”)
New Metrics for Economic Complexity: Measuring the Intangible Fitness of Countries and Complexity of Products