Economic forecasting: the good, the bad, and the ugly

What are the costs of an inaccurate forecast? How can forecasters do better? The latest WSJ Online Econoblog is about The Perils of Forecasting, featuring bloggers  James Hamilton of Econbrowser and Kash Mansori of Angry Bear. They end up more or less on the same page.

Hamilton:

Both for purposes of making forecasts, as well as for basing policy on them, I think our strongest asset is to maintain a fair degree of humility about our ability to predict what's coming next. ...So here's my zen: Don't ask for too much of your forecast or your policy, and it won't disappoint you.

Kash:

..my concluding wish would be the same as yours: that policy makers, be they at the Fed, Congress, the White House, or anywhere else, behave as if the future is extremely uncertain -- which it is. ...A more explicit acknowledgement that even the best forecasts are only very, very rough guesses might help to reduce violations of the "Economic Hippocratic Oath": First, do no harm.

Comments

[Angry Economist]

My very own golden rules of forecasting:

1. Forecasts should be used as part of a process of trying to understand the future – they provide only a partial insight into the economy
2. Any judgements about the future are not facts waiting to happen – there is a chance that they won’t come true
3. Any judgements about the future are based on current information – and this information can be out of date, inaccurate or wrong
4. The forecasts you use should be based on the most accurate (thanks dearieme) and up-to-date information available
5. It is strongly recommended that forecasts do not lead policy response
6. For any forecast it is correct to focus on broad movements and changes rather than on precise numbers
The user should recognise that all projections are subject to error
7. Forecasts cannot predict shocks or sudden events
8. Forecasts should be read with a critical eye – they are usually based on modelling techniques and can overlook the specific uniqueness of local characteristics
9. Finally, forecasts should never be used as the sole input into planning or decision-making