The project that has now secured funding, entitled “BAyesian Estimation for Heterogeneous Agent New Keynesian Models” (BASEforHANK), is geared toward developing a software tool for political decision-makers that will show them how planned measures will affect the economy as a whole as well as income levels and wealth distribution. This will make it easier for them to understand the consequences of their policies.
The tool is based on existing dynamic stochastic general equilibrium (DSGE) models, which can be found at virtually every political institution nowadays. For instance, central banks routinely use these kinds of equilibrium models to assess the impact of their (interest-rate) policy on the economic cycle. However, their structure and their algorithms are largely restricted to scenarios that are predicated on a merely representative budget or company. “This prevents any analysis of economic inequality and questions of distribution, which is a key issue in contemporary economic policy,” says Professor Christian Bayer, who is also a member of two Clusters of Excellence—the Hausdorff Center for Mathematics at the University of Bonn and ECONtribute at the Universities of Bonn and Cologne. “In both Europe and the US, for example, large sums of money were poured into stabilizing the economy during the COVID-19 pandemic. However, the likely impact of these measures was evaluated in the same way as had been done 50 years ago: based on rules of thumb rather than verified economic equilibrium models.” Not all households are hit equally hard by the economic consequences of climate change or the energy crisis either. The only way that political decision-makers will be able to come up with actions that are effective across the board while leaving no-one behind is with instruments that model these heterogeneities.
Having an innovative, easy-to-use modeling platform at their fingertips that allows heterogeneous agent New Keynesian (HANK) models to be developed would thus be a real game-changer for the political institutions. However, it would need to be just as quick, versatile and user-friendly as the tools currently available for representative agents while also incorporating inequality-related feedback from political decisions. The BASEforHANK pilot software is designed to offer this in future and become a key tool in macroeconomic policymaking.
Built on a byproduct of basic research
The core element of BASEforHANK emerged as a byproduct of the basic research being undertaken in another ERC-funded project. Back in 2016, Christian Bayer was awarded a €1.3 million ERC Consolidator Grant (press release in German only) and developed the pilot software that is now being modified and significantly enhanced in the latest ERC PoC project in order to make it more versatile and user-friendly. This is actually the third ERC grant that Professor Bayer has received from the ERC. As long ago as 2011, he secured a Starting Grant, which enabled the pioneering work on which his other projects are now building.
Yet another PoC project for the University of Bonn
“Following in the footsteps of the other ERC Proof of Concept projects in the natural sciences and medicine, we’ve now had a successful application from the field of economics too,” says Sandra Speer, Head of the enaCom Transfer Center. “PoC projects in the social sciences are fairly uncommon compared to the natural sciences and engineering.” enaCom advises University of Bonn researchers on applying for this transfer-focused grant program. “The great appeal, but also the great challenge, in putting Professor Bayer’s innovative toolbox of economic models to practical use now lies in commercializing the pilot software for a very speficic market segment,” adds Daniela Treutlein, an Innovation Scout at the enaCom Transfer Center. “The ERC Proof of Concept funding will enable the project to formulate a suitable business model with help from PROvendis GmbH.”
The €150,000 ERC Proof of Concept Grants support early-stage research work capable of making a commercial or societal impact. They are only available to researchers who have already received an ERC grant and are looking to take the pioneering research that it funded and develop it into real-life applications. The funding is intended to help bridge the gap between research findings and the early stages of commercialization.