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Methodological issues in forecasting: Insights from the egregious business forecast errors of late 1930

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  • Robert Goldfarb
  • H. O. Stekler
  • Joel David

Abstract

This paper examines some economic forecasts made in late 1930 that were intended to predict economic activity in the United States in order to shed light on several methodological issues. We document that these forecasts were extremely optimistic, predicting that the recession in the US would soon end, and that 1931 would show a recovery. These forecasts displayed egregious errors, because 1931 witnessed the largest negative growth rate for the US economy in any year in the twentieth century. A specific question is what led forecasters to make such serious and substantial empirical errors. A second more general issue involves the methodology of forecasting. The 1930 forecasts were sometimes based on explicit analogies with previous serious business cycles. Modern forecasting approaches are based on techniques that may not be recognized as analogies. Using the 1930 forecasts, we examine the implicit-analogy content of forecasts, and what might render such implicit analogies valid or invalid. This 1930 forecast example also resonates beyond the confines of economic methodology because forecasts about the Great Depression are of continuing interest to the profession at large, and we produce a forecast series not previously available.

Suggested Citation

  • Robert Goldfarb & H. O. Stekler & Joel David, 2005. "Methodological issues in forecasting: Insights from the egregious business forecast errors of late 1930," Journal of Economic Methodology, Taylor & Francis Journals, vol. 12(4), pages 517-542.
  • Handle: RePEc:taf:jecmet:v:12:y:2005:i:4:p:517-542
    DOI: 10.1080/13501780500343524
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    References listed on IDEAS

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    1. Wesley Clair Mitchell, 1927. "Business Cycles: The Problem and Its Setting," NBER Books, National Bureau of Economic Research, Inc, number mitc27-1, June.
    2. Wesley Clair Mitchell, 1927. "Introductory pages to "Business Cycles: The Problem and Its Setting"," NBER Chapters,in: Business Cycles: The Problem and Its Setting, pages -23 National Bureau of Economic Research, Inc.
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    Cited by:

    1. Stekler, H.O., 2007. "The future of macroeconomic forecasting: Understanding the forecasting process," International Journal of Forecasting, Elsevier, vol. 23(2), pages 237-248.
    2. Emma Catalfamo, 2018. "French Nowcasts of the US Economy during the Great Recession: A Textual Analysis," Working Papers 2018-001, The George Washington University, Department of Economics, Research Program on Forecasting.
    3. Stekler, Herman & Symington, Hilary, 2016. "Evaluating qualitative forecasts: The FOMC minutes, 2006–2010," International Journal of Forecasting, Elsevier, vol. 32(2), pages 559-570.
    4. Herman O. Stekler & Raj M. Talwar, 2011. "Economic Forecasting in the Great Recession," Working Papers 2011-005, The George Washington University, Department of Economics, Research Program on Forecasting.
    5. Green, Kesten C. & Armstrong, J. Scott, 2007. "Structured analogies for forecasting," International Journal of Forecasting, Elsevier, vol. 23(3), pages 365-376.
    6. Herman O. Stekler & Hilary Symington, 2014. "How Did The Fomc View The Great Recession As It Was Happening?: Evaluating The Minutes From Fomc Meetings, 2006-2010," Working Papers 2014-005, The George Washington University, Department of Economics, Research Program on Forecasting.
    7. Sinclair Tara M, 2009. "Asymmetry in the Business Cycle: Friedman's Plucking Model with Correlated Innovations," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 14(1), pages 1-31, December.
    8. Kathryn Lundquist & H.O. Stekler, 2011. "The Forecasting Performance of Business Economists During the Great Recession," Working Papers 2011-004, The George Washington University, Department of Economics, Research Program on Forecasting.
    9. Gabriel Mathy & Herman O. Stekler, 2016. "Expectations and Forecasting during the Great Depression: Real-Time Evidence from the Business Press," Working Papers 2016-011, The George Washington University, Department of Economics, Research Program on Forecasting.
    10. Gabriel Mathy & Herman O. Stekler, 2017. "Was the Deflation of the Depression Anticipated? An Inference Using Real-time Data," Working Papers 2017-004, The George Washington University, Department of Economics, Research Program on Forecasting.
    11. repec:eee:jmacro:v:53:y:2017:i:c:p:1-15 is not listed on IDEAS

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