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September 30, 2014

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Posted: 30 Sep 2014 12:06 AM PDT

'Why Are Economic Forecasts Wrong So Often?'

Posted: 29 Sep 2014 08:20 AM PDT

At MoneyWatch:

Why are economic forecasts wrong so often?: The Queen of England famously asked why economists failed to foresee the financial crisis in 2008. "Why did nobody notice it?" was her question when she visited the London School of Economics that year.
Economists' failure to accurately predict the economy's course isn't limited to the financial crisis and the Great Recession that followed. Macroeconomic computer models also aren't very useful for predicting how variables such as GDP, employment, interest rates and inflation will evolve over time.
Forecasting most things is fraught with difficulty. See the current dust-up between Nate Silver and Sam Wang over their conflicting predictions about the coming Senate elections. Why is forecasting so hard?
Because so many things can go wrong. For example...

'Reconstructing Macroeconomic Theory to Manage Economic Policy'

Posted: 29 Sep 2014 08:16 AM PDT

New paper from Joseph Stiglitz:

Reconstructing Macroeconomic Theory to Manage Economic Policy, by Joseph E. Stiglitz, NBER Working Paper No. 20517, September 2014 NBER: Macroeconomics has not done well in recent years: The standard models didn't predict the Great Recession; and even said it couldn't happen. After the bubble burst, the models did not predict the full consequences.
The paper traces the failures to the attempts, beginning in the 1970s, to reconcile macro and microeconomics, by making the former adopt the standard competitive micro-models that were under attack even then, from theories of imperfect and asymmetric information, game theory, and behavioral economics.
The paper argues that any theory of deep downturns has to answer these questions: What is the source of the disturbances? Why do seemingly small shocks have such large effects? Why do deep downturns last so long? Why is there such persistence, when we have the same human, physical, and natural resources today as we had before the crisis?
The paper presents a variety of hypotheses which provide answers to these questions, and argues that models based on these alternative assumptions have markedly different policy implications, including large multipliers. It explains why the apparent liquidity trap today is markedly different from that envisioned by Keynes in the Great Depression, and why the Zero Lower Bound is not the central impediment to the effectiveness of monetary policy in restoring the economy to full employment.

[I couldn't find an open link.]

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