Why Did Almost Nobody See Inflation Coming?
Forecasting inflation is a staple of macroeconomic modeling, yet virtually all economists’ predictions for the United States in 2021 were way off the mark.
This dismal performance reflected a collective failure to take economic models seriously enough, as well as other analytical shortcomings.
In 2008, as the global financial crisis was ravaging economies everywhere, Queen Elizabeth II, visiting the London School of Economics, famously asked, “Why did nobody see it coming?”
Forecasts based on extrapolation from the recent past are nearly always as good as, or better than, those based on more sophisticated modeling.
To think that a stimulus of this magnitude would not cause inflation required believing either that such a huge adjustment was possible within a matter of months, or that fiscal policy is ineffective and does not increase aggregate demand. Both views are implausible.
I therefore expect another year of significant US inflation, maybe not as high as in 2021 but plausibly in the 3-4% range. But the most important forecasting lesson from last year is humility.
Jason Furman Project Syndicate 17 January 2022
Jason Furman, Professor of the Practice of Economic Policy at the Harvard Kennedy School and Senior Fellow at the Peterson Institute for International Economics, is a former chair of President Barack Obama’s Council of Economic Advisers.
'Why did nobody notice it?'
Her Majesty’s question ("If these things were so large, how come everyone missed them?")
Chris Giles, FT, November 25 2008
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Economic theory discredited
- Economics may be dismal, but it is not a science
https://www.internetional.se/aztopics.htm#economictheory
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