Namibian economy craves an advanced mathematical model

Namibian economy craves an advanced mathematical model

The financial market plays a significant role in the economy. Generally speaking, Namibia’s financial market is mixed up and too simple without the use of complex derivatives products and in this way is prone to all sorts of global financial risks.

In principle, models that are currently used for dynamic equilibrium systems of the economy are the mainstream neoclassical types. The question that comes to mind is why the financial instability of the country persists? This could mean that those mainstream neoclassical models that are currently used for all sorts of macroeconomic modelling are inherently incapable of explaining the anomalies, e.g. the current recession and the need to stabilize the economy. I am not an economist but am of the view that Namibia needs to borrow advanced mathematical tools to support the economic thinking.

In the past mathematics has been viewed by many as solely an academic exercise. Many heterodox financial economists are quite skeptical about the effectiveness of mathematical models in the real economy and social sciences. As a result the use of mathematical models to guide the implementation of policymaking framework was ignored.

This is justified by the naive belief that economics and classical finance resemble perfect predictive sciences. However, due to the complexity of the economy system such perfect prediction is practically impossible and admits no solution (both from local and global analysis) because the country’s economy is buffeted by various stochastic factors that will never be possible to model under classical assumptions.

I am not undermining the power of economic science; I admit that it can guide us on the general tendency of the economy at large, for example the behaviour of the term structure of interest rates and other complex chains in the economy.

Even employing mathematical approaches, perfect market prediction is also a non-trivial exercise. What mathematics does is that it tries to build models that can quantify and minimize risks in an event of the risk exposure (known as hedging) in the market.

It is about that time that the country makes scientific inquiry, to make use of alternative models of looking at the dynamic system of the Namibian economy. This will help to explain and formulate unknown phenomena and compute and measure their significant values in the economy.

By no means am I trying to over-mathematize the economy, but I am rather trying to propose an approach to modelling financial instability and macroeconomic stabilisation policies. This will allow us to think globally because our resources are distributed globally and it is through mathematics that we can go far beyond intuitions and reveal these unknowns.

I am pretty sure that Namibian economists will agree with me that one of the most popular models for financial instability is the insight of (Minsky 1986) (with Financial Instability Hypothesis). This hypothesis has been neglected for a long time by the mainstream (neoclassical) economists, and was therefore not applied consistently especially in policymaking framework. However, the situation dramatically changed soon after the Global Financial Crisis (GFC) calamity. Since then, Minsky hypothesis together with Godley Lavoie framework were rediscovered by many prominent economists as they give a better insight of how to stabilize an unstable economy by means of the proper macroprudential stabilisation policies (including fiscal austerity, budget deficit hysteria and quantitative easing) by the government and central banks. Markov regime switching approach can as well be incorporated, i.e. running surpluses in happy times and deficits when times are hard.

Not long ago, I attended a Mathematics in Finance conference at Kruger National Park, South Africa. I had the privilege to have a discussion on macroeconomic modelling with Professor Matheus Grasselli who is a director of the field institute for research in mathematical science, Canada. Matheus has a mathematics background but he has made profound contributions in macroeconomic modelling paradigms. As I was keen to explore tractable modelling approaches suitable to the current Namibia financial fiasco, I learned that he developed a framework from empirical evidence and very rich in mathematical construction: the Goodwin-Keen macroeconomic modelling framework, see (Grasselli & Giraud 2016) which shows that in my opinion there is potential that this framework could be useful to Namibia and will solve the current economic situation.

“The model shows that, as long as governments can borrow in their own currency, a spending profile that is responsive enough at very low employment levels but tapers off when the economy recovers leads to finite levels of public debt ratios.”

This framework has been tested in other developing economies. In light of the above, I highly recommend to the Namibian economists and policymakers to consider that framework in their decision-making.
• Mesias Alfeus is a PhD student in Quantitative Finance at the University of Technology, Sydney.

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