BOE Weale Says Credit Shocks Should Inform Economic Model Choice

Bank of England policy maker Martin Weale said the role of credit shocks in the financial crisis should inform economists’ choice of models for understanding the turmoil.

“It seems to me unlikely that a model based on a representative agent can deal satisfactorily with the effects of credit constraints or fears about availability of credit,” he said in a speech today in Wellington, New Zealand.

Officials should instead prefer disaggregate models, which represent the economy as a collection of individual households in different circumstances, Weale said.

“Tightening of credit and fear of tight credit has affected both firms and households and, in the U.K. at least, this may be limiting the scope for recovery,” he said. “The development of models of this type is going to help us understand the nature of the shocks which have affected the international economy over the last five years.”

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