Understanding Economic Forecasts

by David F. Hendry and Neil R. Ericsson (Eds.)

• ISBN13: 9780262083041
• ISBN10: 0262083043
• Format: Hardcover
• Copyright: 2001-11-01
• Publisher: Mit Pr

Summary

Historically, the theory of forecasting that underpinned actual practice in economics has been based on two key assumptions?-that the model was a good representation of the economy and that the structure of the economy would remain relatively unchanged. In reality, forecast models are mis-specified, the economy is subject to unanticipated shifts, and the failure to make accurate predictions is relatively common. In the last decade, economists have developed new theories of economic forecasting and additional methods of forecast evaluation that make less stringent assumptions. These theories and methods acknowledge that the economy is dynamic and prone to sudden shifts. They also recognize that forecasting models, however good, are greatly simplified representations that will be incorrect in some respects. One advantage of these newer approaches is that we can now account for the different results of competing forecasts. In this book academic specialists, practitioners, and a financial journalist explain these new developments in economic forecasting. The authors discuss how forecasting is conducted, evaluated, reported, and applied by academic, private, and governmental bodies, as well as how forecasting might be taught and what costs are induced by forecast errors. They also describe how econometric models for forecasting are constructed, how properties of forecasting methods can be analyzed, and what the future of economic forecasting may bring.

Table of Contents

List of Figures	xi
List of Tables	xiv
Preface	xv
List of Contributors and Their Affiliations	xvii
Editors' Introduction	1	(14)
Economic Forecasting	2	(2)
An Analogy	4	(3)
Forecasting Methods	7	(2)
Evaluating Forecasts	9	(1)
Summary of the Chapters	10	(5)
How Economists Forecast	15	(27)
David F. Hendry
Introduction	15	(2)
Forecast Terminology	17	(3)
Some Essential Background	20	(4)
Methods of Forecasting	24	(2)
On Winning at Forecasting	26	(1)
On Determining the Forecast Winner	27	(1)
Forecast Confidence Intervals	27	(2)
How Economists Analyze Their Methods	29	(4)
The Main Problems Affecting Economic Forecasts	33	(1)
Forecasting 300 Years of UK Industrial Output	34	(6)
Some Potential Solutions	40	(1)
Conclusions	41	(1)
Economic Modeling for Fun and Profit	42	(12)
Paul Turner
Introduction	42	(2)
Alternative Forecasting Methods	44	(3)
A Basic Model of the UK Economy	47	(5)
Concluding Remarks	52	(2)
Making Sense of Published Economic Forecasts	54	(14)
Diane Coyle
A Famous Forecasting Competition	54	(3)
Spurious Precision	57	(2)
Forecast Errors	59	(3)
Confusing Public-service Forecasts with Targets	62	(1)
Forecast Uncertainty and Policy Lags	63	(2)
Forecasting Is Difficult	65	(1)
Conclusions	66	(2)
Forecast Uncertainty in Economic Modeling	68	(25)
Neil R. Ericsson
Introduction	68	(2)
Forecasts, Outcomes, and Forecast Errors	70	(6)
Sources of Forecast Uncertainty	76	(15)
Conclusions	91	(2)
Evaluation of Forecasts	93	(11)
Clive W. J. Granger
Model Evaluation in Economics	93	(2)
Forecasting Background	95	(2)
Evaluation of a Point Forecast	97	(2)
Different Situations for Evaluation	99	(1)
Forecasts and Decisions	100	(3)
Concluding Remarks	103	(1)
Forecasting and the UK Business Cycle	104	(20)
Denise R. Osborn
Marianne Sensier
Paul W. Simpson
Introduction	104	(4)
The Nature of the UK Business Cycle	108	(2)
Univariate Business-cycle Models	110	(5)
Interest Rates and Output Forecasts	115	(5)
Measures of Forecast Accuracy	120	(2)
Concluding Remarks	122	(2)
Modeling and Forecasting at the Bank of England	124	(25)
Neal Hatch
Introduction	124	(1)
Models, Forecasts, and Policy	125	(13)
A Suite of Models	138	(4)
Properties of the Bank's Core Model	142	(3)
Other Modeling Techniques and Information Sources	145	(3)
Conclusions	148	(1)
Forecasting the World Economy	149	(21)
Ray Barrell
Introduction	149	(4)
Endemic Structural Change	153	(1)
European Labor Markets	154	(2)
Japanese Consumers' Expenditure	156	(1)
The East Asian Financial Crisis, 1997-1998	157	(2)
The Collapse of LTCM in 1998	159	(1)
Living in a Low-inflation World	160	(4)
Inflation Uncertainty in the United Kingdom	164	(5)
Conclusions	169	(1)
The Costs of Forecast Errors	170	(15)
Terence Burns
Introduction	170	(1)
The General Case for Economic Forecasting	171	(2)
Some Characteristics of Forecast Errors	173	(2)
Forecast Errors under a Given Policy Framework	175	(6)
Choosing the Policy Framework	181	(2)
Conclusions	183	(2)
Epilogue	185	(8)
David F. Hendry
Neil R. Ericsson
A Retrospective	186	(2)
A More Formal Approach	188	(2)
Concluding Remarks	190	(3)
References	193	(10)
Author Index	203	(2)
Subject Index	205