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Crash-test computing

A new kind of financial model could avert another crisis

By Philip Ball   August 2010

Critics of conventional economic theory have never had it so good: the credit crunch has left orthodox thinking, embraced by most of the establishment, a sitting duck. But can alternative economic models help us to anticipate such crises, or better manage them? In short, can the “dismal science” be made truly scientific?

In summer 2007 Frederic Mishkin, a governor of the Federal Reserve, forecast that the banking problems triggered by stagnation of the US housing market would be a minor blip. His prediction was based on the most orthodox theoretical framework: dynamic stochastic general equilibrium (DSGE) models. The subsequent near-collapse…

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