Academic journal article Business Economics

Economic Forecasting in the Private and Public Sectors

Academic journal article Business Economics

Economic Forecasting in the Private and Public Sectors

Article excerpt

The similarities and differences between public and private forecasting are highlighted in this article. The advantages and limitations of economic models and judgmental forecasts are reviewed, and a process that incorporates features of both is recommended. Forecasting is also complicated by difficulties in determining where we are at the present time as well as an increasingly elusive and complex economic structure.

OVER THE YEARS, I have been involved with economic forecasting from a variety of perspectives-as producer and consumer, both inside nd outside government. I would like to take this opportunity to reflect on some of the similarities and differences between economic forecasting in the private and public sectors. The broad approaches taken and the conceptual difficulties faced by forecasters are quite similar in both sectors. The principal differences surround the context and focus of the forecasts and the ends that they serve.

Let me begin by highlighting what I see as the chief similarities between private and public sector forecasting. This group is, of course, more aware than most that I address of the opportunities, challenges, and limitations presented by economic forecasting. The same cannot often be said of the constituency served by the forecaster. In both the private and public sectors, a large gap commonly exists between the expectations of consumers of forecasts and the abilities of the forecaster. in some cases the forecaster must overcome considerable skepticism that economic projections are of any value. In other cases, expectations reach far beyond the abilities of the practitioner. In either situation, the clarity with which the forecaster can communicate the key conditioning assumptions and the uncertainties surrounding a forecast can be as important as the predictions themselves.

Whether employed by the government or by private firms, it is vital that forecasters have a clear understanding of what economic events they are attempting to anticipate and over what time periods. Success in this effort requires a thorough knowledge of how the focus of the forecast relates to the objectives of the decisionmaker and reflects the critical features of the economic environment in which he or she must operate. Too often one observes forecasts that seem to focus on a set of economic statistics because they are readily available or the traditional object of analysis, rather than because of their immediate relevance to the decisionmaker The adept forecaster is capable of drawing the distinction.

MODELS VS. JUDGMENTAL FORECASTING

Over the years, one recurring theme in discussions of forecasting - both within and outside government - has been the debate over the relative merits of economic models and so-called "intuitive" or judgmental approaches. This is a distinction with little meaning or practical relevance. With a few exceptions, it is rare to find pure practitioners from either camp. Most of us are involved in some combination of these efforts. To be sure, there is considerable variation in how economists achieve this melding of models and judgment, and in the weights implicitly assigned to each approach. But the mix is almost always present, and this is appropriate.

I would even take the argument a step further and suggest that, in some respects, it is difficult to distinguish models from judgments. At their core, the two approaches can be quite similar, frequently being based on the same economic theories and similar bodies of empirical evidence. Of course, the intuitive forecaster generally does not have a thousand equations ready to execute at a moment's notice. More often, he or she relies on a handful of key economic relationships, with the relative importance of these key relationships shifting as the economic landscape changes. Much the same is true, in a sense, of model-based forecasters. For a given economic episode, usually only a few key equations in an econometric model drive the forecast produced by the model. …

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