Nymoen R. On the Low Degree of Entropy Implied by the Solutions of Modern Macroeconomic Models.
Entropy (Basel) 2022;
24:1728. [PMID:
36554133 PMCID:
PMC9777614 DOI:
10.3390/e24121728]
[Citation(s) in RCA: 0] [Impact Index Per Article: 0] [Reference Citation Analysis] [What about the content of this article? (0)] [Affiliation(s)] [Abstract] [Key Words] [Track Full Text] [Figures] [Subscribe] [Scholar Register] [Received: 10/26/2022] [Revised: 11/22/2022] [Accepted: 11/23/2022] [Indexed: 06/17/2023]
Abstract
The non-causal ("forward-looking") solution used routinely in academic macroeconomics may represent a violation of a law of entropy, namely that the direction of time is one way (from the past and towards the present), and that the variance of economic processes increases with time. In order to re-establish a degree of compatibility with the law of entropy, so called hybrid forms are required add-ins to DSGE (Dynamic Stochastic General Equilibrium) models. However, the solution that uses hybrid forms is a particular special case of a causal solutions of autoregressive distributed lags, VARs and recursive and simultaneous equations models well known from empirical macro econometrics. Hence, hybrid forms of small scale DSGE models can be analysed and tested against competing model equations, using an econometric encompassing framework.
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