The Unassuming Economist

A new economic letter by Michael Bauer says that “Interest rates are inherently difficult to predict, and the simple random walk benchmark has proven hard to beat. But macroeconomics can help, because the long-run trend in interest rates is driven by the trend in inflation and the equilibrium real interest rate. When forecasting rates several years into the future, substantial gains are possible by predicting that the gap between current interest rates and this long-run trend will close with increasing forecast horizon. This evidence suggests that accounting for macroeconomic trends is important for understanding, modeling, and forecasting interest rates.”

Continue reading here.

A new article by Alasdair Macleod quoted my research: “Loungani was recently interviewed for a BBC programme, updating his original paper. In that interview, he claimed that over three decades, of the 150 recessions recorded only two had been forecast, implying that since the turn of the century no recessions had been forecast at all.ii The failure rate has increased to 100%, not decreased, as might be expected from economic models that are updated in the light of experience.”

Continue reading here.

Me on BBC Radio, talking about forecasting (I come on at 4.25 for a couple of minutes and then at the end at 23.00).

Deutsche Bank’s chief international economist Torsten Slok writes: “The Fed’s Survey of Professional Forecasters for 2017 Q2 shows that 10-year rates are expected to rise to 2.9% over the coming 12 months. The problem is that Wall Street economists have been consistently too optimistic for the past 15 years, see chart below. To correct for the excessive optimism among forecasters, one can subtract the average forecast error, i.e. the average mistake made for the past 15 years by the forecasting community, which is 0.6%-points. Doing that gives a 12-month forecast for 10-year rates of 2.3%.”

The latest Regional Economic Outlook (REO) for Asia and Pacific says that: “The Asia-Pacific region continues to be the world leader in growth, and recent data point to a pickup in momentum. Growth is projected to reach 5.5 percent in 2017 and 5.4 percent in 2018. Accommodative policies will underpin domestic demand, offsetting tighter global financial conditions. Despite volatile capital flows, Asian financial markets have been resilient, reflecting strong fundamentals. However, the near-term outlook is clouded with significant uncertainty, and risks, on balance, remain slanted to the downside. On the upside, growth momentum remains strong, particularly in advanced economies and in Asia. Additional policy stimulus, especially U.S. fiscal policy, could provide further support. On the downside, the continued tightening of global financial conditions and economic uncertainty could trigger volatility in capital flows.”

Continue reading here.