Citation:
[Journal:] Economics: The Open-Access, Open-Assessment E-Journal [ISSN:] 1864-6042 [Volume:] 13 [Issue:] 2019-40 [Publisher:] Kiel Institute for the World Economy (IfW) [Place:] Kiel [Year:] 2019 [Pages:] 1-17
Abstract:
Both mathematical modelling and simulation methods in general have contributed greatly to understanding, insight and forecasting in many fields including macroeconomics. Nevertheless, we must remain careful to distinguish model-land and model-land quantities from the real world. Decisions taken in the real world are more robust when informed by estimation of real-world quantities with transparent uncertainty quantification, than when based on 'optimal' model-land quantities obtained from simulations of imperfect models optimized, perhaps optimal, in model-land. The authors present a short guide to some of the temptations and pitfalls of model-land, some directions towards the exit, and two ways to escape. Their aim is to improve decision support by providing relevant, adequate information regarding the real-world target of interest, or making it clear why today's model models are not up to that task for the particular target of interest.