Simulation technology can help prevent financial crises - EC

Simulation technology can help prevent financial crises - EC

The European Commission (EC) has unveiled economic simulation software it says could help prevent future financial crises.

Produced by an EU-backed research project worth EUR2.5 million that ended today, the software platform, dubbed Eurace, applies simulation technology called Flame (Flexible Large-scale Agent Modelling Environment) that is also used for computer generated images in movies.

It predicts the interaction between large populations of different economic actors, like households and companies, banks and borrowers or employers and job-seekers, who trade, and compete like real people.

By giving each simulated agent individual and realistic behaviour and interactions that show how markets will evolve, these massive scale simulations can better test new policies tackling future societal challenges, says the EC.

Using high-powered computing, each simulated household, business or bank will make different decisions in reaction to various monetary, fiscal or innovation policies. This means that the impact of one policy in one market at one point in time is no longer assessed in isolation from other factors.

THE EC says the technology is particularly relevant now after traditional economics failed to predict the scale of the knock-on effect of the credit crunch on the world economy.

The new software shows how banks react in different ways by looking at a wide range of factors like how much reserves they must keep compared to investments, their savers' consumption/investment and saving patterns, and psychological factors like confidence in the market.

It can then give policymakers - who want to know how fiscal and monetary reforms will affect banks and customers - a better warning of the scale of a financial crisis' impact on the real economy. The software can also simulate the same scenario with an older demographic to help plan for an older Europe, or with limited energy supplies.

The software is designed to run on supercomputers but can be accessed from any connected PC, enabling economists and policymakers to connect hundreds of thousands of small simulated actions and reactions across the economy.

Viviane Reding, EU Commissioner, information society and media, says: "This first class European research can help us make the move from the economics of pen and paper to the economics of super-computers. The results of this research project, will complement traditional economic statistics and assumptions about how economic actors react by enabling better testing of a policy's effects on people, while still on the drawing board. I expect government researchers and national research institutes will act quickly to put this tool at the disposal of decision- makers as soon as possible."

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