The Unassuming Economist

A BBC Radio 4 programme quoted my research:

“Prakash Loungani at the IMF analysed the accuracy of economic forecasters and found something remarkable and worrying. ‘The record of failure to predict recessions is virtually unblemished,’ he said.

His analysis revealed that economists had failed to predict 148 of the past 150 recessions. Part of the problem, he said, was that there wasn’t much of a reputational gain to be had by predicting a recession others had missed. If you disagreed with the consensus, you would be met with scepticism. The downside of getting it wrong was more personally damaging than the upside of getting it right.”

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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.”

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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.”

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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%.”