Wednesday, October 17, 2007

Much wisdom near 

John Palmer gets this right about economic forecasting.
  1. Big-time models are expensive and high opportunity costs (if you think model-builders have valuable alternative uses)
  2. Big-time models, despite the major investments in them, were not outpredicting simple myopic predictions much, if at all.
There was a relatively well-known paper by Ed Feige and Douglas Pearce thirty years ago that argued for economically rational expectations, meaning that additional information or processing costs have to be compared to the benefits of getting better predictions. It's a point I've driven home in advising researchers -- particularly in other country central banks -- to get them over their rapture with the latest complicated modeling problem.