Friday, March 10, 2017

Predictive power and macroeconomics

I believe macroeconomics has three main components: past, present and future. Macroeconomists should have detailed knowledge about economic history, be able to explain economic phenomena and be able to predict the future economy. An unusually gifted macroeconomist should be able to predict many different macroeconomic variables (employment, industries, companies, trade, etc.) for many different countries over short and long time horizons. Nobel laureate Paul Samuelson once said in an interview,
My notion of a fruitful economic science would be that it can help us explain and understand the course of actual economic history. A scholar who seriously addresses commentary on contemporary monthly and yearly events is, in this view, practicing the study of history—history in its most contemporary time phasing.
I believe there should be a standard test for macroeconomists to predict a collection of about 40 statistics for the economy (for example, GDP growth, inflation and exports). The weighted sum of errors for all the predictions would be complied to determine a numerical grade for the macroeconomist. In other words, macroeconomists should try to predict the future statistics on Econ Factbook. This test would be similar to an IQ test for macroeconomics.

What tools would a macroeconomist use to for this test? I think the best predictions in the short term would be based on mathematical models (such as DSGE) but predictions further into the future would rely more on judgment calls. Predictions far into the future (such as 10 or 30 years) require knowledge about new technologies, future political institutions, future consumer demand and the evolution of society. This is why macroeconomics is so difficult.

I think this test would reveal which theoretical systems are most effective for macroeconomics. Maybe economists who specialize in economic history would perform the best. Maybe the econometricians would perform the best. I'm not sure who would produce the most accurate predictions, but I think this would be a productive exercise for macroeconomists.


  1. Interesting! ☻
    Capability of predicting should the a key competence to acquire in several fields: fund management, macroeconomics...

    1. Thanks teamneurs for bringing up fund management which the most visible example of this idea already existing. That's why I have Ray Dalio (hedge fund manager) as the picture.