Forecasting the macroeconomy Because policies act with lags,policymakers must predict future conditions. Ways to generate forecasts: -Leading economic indicators:data series that fluctuate in advance of the economy -Macroeconometric models:Large-scale models with estimated parameters that can be used to forecast the response of endogenous variables to shocks and policies
• Forecasting the macroeconomy • Because policies act with lags, policymakers must predict future conditions. • Ways to generate forecasts: – Leading economic indicators: data series that fluctuate in advance of the economy – Macroeconometric models: Large-scale models with estimated parameters that can be used to forecast the response of endogenous variables to shocks and policies
Forecasting the macroeconomy Because policies act with lags, policymakers must predict future conditions. The preceding slides show that the forecasts are often wrong.This is one reason why some economists oppose policy activism
• Forecasting the macroeconomy • Because policies act with lags, policymakers must predict future conditions. • The preceding slides show that the forecasts are often wrong. This is one reason why some economists oppose policy activism
·The Lucas Critique Due to Robert Lucas won Nobel Prize in 1995 for“rational expectations” Forecasting the effects of policy changes has often been done using models estimated with historical data. Lucas pointed out that such predictions would not be valid if the policy change alters expectations in a way that changes the fundamental relationships between variables
• The Lucas Critique • Due to Robert Lucas won Nobel Prize in 1995 for “rational expectations” • Forecasting the effects of policy changes has often been done using models estimated with historical data. • Lucas pointed out that such predictions would not be valid if the policy change alters expectations in a way that changes the fundamental relationships between variables
An example of the Lucas Critique Prediction(based on past experience):an increase in the money growth rate will reduce unemployment The Lucas Critique points out that increasing the money growth rate may raise expected inflation,in which case unemployment would not necessarily fall
• An example of the Lucas Critique • Prediction (based on past experience): an increase in the money growth rate will reduce unemployment • The Lucas Critique points out that increasing the money growth rate may raise expected inflation, in which case unemployment would not necessarily fall
。The Jury'sOut. Looking at recent history does not clearly answer Question 1: -It's hard to identify shocks in the data, > and it's hard to tell how things would have been different had actual policies not been used
• The Jury’s Out. • Looking at recent history does not clearly answer Question 1: – It’s hard to identify shocks in the data, – and it’s hard to tell how things would have been different had actual policies not been used