The European Commission has unveiled breakthrough research that could help economists answer questions about future economy through simulation software. Produced by an EU-backed research project worth €2.5 million that came to a successful end today, the software applies simulation technology also used for computer generated images (CGI) 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.

This simulation technology developed by EU-backed research uses computer-based experiments to focus on the relationship between large populations of different economic actors across many interconnected markets. It is the first time this technology is applied on such a big scale using high-powered computing.

Each simulated household (or business, or bank) will make different decisions in reaction to various monetary, fiscal or pro-innovation policies including, for example, whether to remain in a job or seek a new one, how much of a wage is saved, spent or invested. 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.

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.

Designed to run on supercomputers that allow simulation to be carried out on a massive scale but accessible to any connected desktop PC, the software can be used by economists and policymakers with no knowledge of computer programming. By connecting hundreds of thousands of small simulated actions and reactions across the economy, the software can give policymakers better and bigger pictures of their policy impact on people's life and work.

The three-year project was carried out by economists and computer scientists from eight universities (in Italy, France, Germany, Turkey and the UK), brought together by the EU and financed from the European Commission's technology research budget.

Background

The research project that came to an end today has resulted in the software platform for economic simulation software called EURACE , that runs on simulation technology called FLAME (Flexible Large-scale Agent Modelling Environment). The project was co-funded with €2.1 million under the Commission's overall research programme ( Sixth Framework Programme 2001-2006) started in 2006. It was part of the Commission's initiative to boost high-risk research in future and emerging information technologies

The Commission recently called on EU countries to increase high-risk research investment to catch up with the US, China and Japan. The Commission will lead by example, boosting the current €100 million annual funding 70% by 2013.