How Accuracy and Reliability of an Economic Forecast Are Affected by a Number of Factors
An economic forecast is a prediction of the future behavior of one or more economic variables, such as prices, income, or employment. A successful forecast requires the existence of a representation, or model, that is able to describe and predict the underlying economic process. This model or other representation may be mathematical in nature, and is typically based on a great deal of acquired knowledge concerning the patterns of past behavior, plus at least some faith that these patterns will persist into the future.
A key consideration is that economic processes are more complicated than simple, mechanical phenomena like the motion of large bodies. The complexities involved make it extremely difficult, and perhaps even impossible, to produce an accurate economic forecast for any given time horizon.
For example, it is well known that economic projections are heavily influenced by what type of economic theory a forecaster subscribes to. For example, a forecaster who believes that business activity is determined by the supply of money is likely to place greater emphasis on indicators reflecting this belief, which could lead to biased or subjective projections.
In addition, there are a number of practical factors that affect the accuracy and reliability of economic forecasts. For instance, as discussed in this article and elsewhere in the literature, it is well-known that the largest errors in some series occur around the start and end of a recession because of the tendency for many models to yield large forecasting errors when the economy begins or ends a contraction.
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