The Making of National Economic Forecasts

The Making of National Economic Forecasts

Edited by Lawrence R. Klein

This important book, prepared under the direction of Nobel Laureate Lawrence R. Klein, shows how economic forecasts are made. It explains how modern developments in information technology have made it possible to forecast frequently – at least monthly but also weekly or bi-weekly – depending upon the perceived needs of potential forecast users and also on the availability of updated material.

Chapter 1: Background to National Economic Forecasts and the High-frequency Model of the USA

Lawrence R. Klein

Subjects: economics and finance, behavioural and experimental economics, econometrics, financial economics and regulation

Extract

Lawrence R. Klein GUIDING HYPOTHESES Two main hypotheses about a national economy are in the background here, shaping the national economic forecasts described in this volume: 1. 2. The national economy is viewed as a highly multivariate macroeconomic concept. The ultimate test of the validity of economic propositions is their ability to forecast. Economists are often ridiculed for being ‘two-handed’ – on the one hand a certain outcome to an economic event could result, but on the other hand a quite different outcome could also occur. The user of economic interpretation of actual events generally wants one specific interpretation and not two or more. There is an inherent reason for the ambiguity or confusion that often accompanies professional economic assessment. Economics is a social science in which controlled experimentation, in a strict sense, is not possible. This distinguishes social science from natural science. In the latter field of study or knowledge, controlled experimentation is generally possible. There have been attempts to introduce experimental methods into economics, but they do not have the clear-cut power to prove or disprove hypotheses about economic behavior. Some social sciences have more opportunity for experimental control than do others, and some pedagogical findings can be developed for making limited decisions, but these are very special cases and not generally applicable to a wide variety of economic analyses, certainly not to the macroeconomics of large human populations, in a realistic national or international setting. Also, there are some non-experimental natural sciences that are much 1 2 The...

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