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Has Macro-Forecasting Failed?

  • Victor Zarnowitz
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    The answer to this question depends on the treatment of logically and empirically prior questions about (1) what the forecasts are and why they are needed, and (2) what can reasonably be expected of them. Further, what forecasters can and should do cannot be established without studying the record and assessing the probable future of their endeavors. Accordingly, the basic approach taken in this paper is to ask of the assembled data what professional standards have economists engaged in macro-forecasting been able to attain and maintain in competing with each other and alternative methods. There is much disenchantment with economic forecasting. The difficult question is how much of it is due to unacceptably poor performance and how much to unrealistically high prior expectations. My argument is that the latter is a major factor. In times of continuing expansion with restrained inflation, as in the 1960s, macro-forecasts looked good and economists were held in high repute. Later when inflation accelerated, serious recessions reappeared, and long-term growth of productivity and total output slackened, the errors of macroeconomic models and forecasts, and the old and new controversies among the economists, received increased public attention. The reputation of the profession suffered, and the interest of academic economists in forecasting, never very strong, weakened still more. Yet the performance of professional economic forecasters, when assessed proper relative terms, has been considerably better in recent times than in the earlier post-World War II period. What happened is that the improvements fell short of enabling the forecasters to cope with the new problems they faced.

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    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3867.

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    Date of creation: Oct 1991
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    Handle: RePEc:nbr:nberwo:3867
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    1. Zarnowitz, Victor & Moore, Geoffrey H, 1982. "Sequential Signals of Recession and Recovery," The Journal of Business, University of Chicago Press, vol. 55(1), pages 57-85, January.
    2. Lupoletti, William M & Webb, Roy H, 1986. "Defining and Improving the Accuracy of Macroeconomic Forecasts: Contributions from a VAR Model," The Journal of Business, University of Chicago Press, vol. 59(2), pages 263-85, April.
    3. Alan S. Blinder, 1984. "Can The Production Smoothing Model of Inventory Behavior be Saved?," NBER Working Papers 1257, National Bureau of Economic Research, Inc.
    4. Wallis, Kenneth F, 1989. "Macroeconomic Forecasting: A Survey," Economic Journal, Royal Economic Society, vol. 99(394), pages 28-61, March.
    5. Zarnowitz, Victor, 1985. "Rational Expectations and Macroeconomic Forecasts," Journal of Business & Economic Statistics, American Statistical Association, vol. 3(4), pages 293-311, October.
    6. Robert B. Litterman, 1985. "Forecasting with Bayesian vector autoregressions five years of experience," Working Papers 274, Federal Reserve Bank of Minneapolis.
    7. Holden, K. & Broomhead, A., 1990. "An examination of vector autoregressive forecasts for the U.K. economy," International Journal of Forecasting, Elsevier, vol. 6(1), pages 11-23.
    8. Fair, Ray C & Shiller, Robert J, 1990. "Comparing Information in Forecasts from Econometric Models," American Economic Review, American Economic Association, vol. 80(3), pages 375-89, June.
    9. Victor Zarnowitz, 1972. "Forecasting Economic Conditions: The Record and the Prospect," NBER Chapters, in: Economic Research: Retrospect and Prospect, Volume 1, The Business Cycle Today, pages 183-239 National Bureau of Economic Research, Inc.
    10. Stephen K. McNees, 1988. "How accurate are macroeconomic forecasts?," New England Economic Review, Federal Reserve Bank of Boston, issue Jul, pages 15-36.
    11. Stephen K. McNees, 1990. "Man vs. model? The role of judgment in forecasting," New England Economic Review, Federal Reserve Bank of Boston, issue Jul, pages 41-52.
    12. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
    13. Bathcelor, Roy & Dua, Pami, 1990. "Forecaster ideology, forecasting technique, and the accuracy of economic forecasts," International Journal of Forecasting, Elsevier, vol. 6(1), pages 3-10.
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