Forecasting When You Suspect 'This Time Is Different': A Typical Day in the Life of a Macroeconomic Forecaster

• Activity Number: 357
• Type: Roundtables
• Date/Time: Tuesday, July 31, 2012 : 12:30 PM to 1:50 PM
• Sponsor: Business and Economic Statistics Section
• Author(s): Edward Leamer*+
• Companies: University of California at Los Angeles
• Keywords: forecasting ; regime change ; US economy

Abstract

Real macro-economic forecasting is a personal tug-of-war between extrapolative time series forecasts offered by the left side of the brain and the intuition that "this time is different" offered by the right side. The left-dominant forecasters are the number crunchers who offer forecasts that are either simple or elaborate versions of regression toward the mean. Left-dominant forecasters may become wealthy but they do not become famous. The famous forecasters are the right-dominant macro gurus who offer stories not numbers. Their lack of numbers allows these macro gurus to celebrate their successes while not being embarrassed by their errors.

The best place to be is somewhere between the technical forecasters and the gurus, offering sophisticated access to the historical data and also wisdom regarding changes in the system that need to be accommodated to make the forecasts accurate and the stories interesting.

I will discuss a number of instances in which I was confronted with a "this time is different" hypothesis. Sometimes I went "right" and sometimes "left," sometimes successfully and sometimes not.