The Tool Central Bankers Need Most Now

In his final months as European Central Bank president in 2011, a frustrated Jean-Claude Trichet lamented that "In the face of the crisis, we felt abandoned by conventional tools." Economics models, he argued, could learn from other disciplines like physics, engineering and psychology; they should better capture the simple fact that humans are not rational, particularly in a crisis.

His call resulted in a European project devoted to building models that are more representative of the real economy -- in particular, models that reflected economies' repeated propensity to generate crises. Those models were, by and large, left on the shelf by mainstream economists and central banks wedded to traditional tools, but they are more relevant now than ever. Using them would, for example, suggest that current inflation targeting is too low.