Macroeconomic Forecasting: A Survey

Developments in macroeconomic forecasting over the last twenty years are surveyed in this paper, which takes the I969 Presidential Address to the Royal Economic Society (Cairncross, I969) as its starting point. Sir Alec Cairncross had found no previous occasion on which the Royal Economic Society had discussed 'this new activity', and so selected economic forecasting as the topic for his address. As retiring Chief Economic Adviser to the Treasury he had been preoccupied with forecasting for the preceding few years, and was well placed to reflect on the new kind of economic forecasting that was. emerging and the new ways in which it was being organised. At the time these were changing fast, with forecasting becoming in particular more heavily based on computable models. A conference in April I969 heard that in the Treasury 'a more elaborate fully formalised model is being programmed for a computer' (Roy, I970); in August I969, at the National Institute of Economic and Social Research (NIESR), an econometric model of the whole economy became an integral part of the quarterly forecasting exercises that had begun, with the publication of the National Institute Economic Review, in I 959. These developments followed the inauguration by the London Business School (LBS) in I966 of the first series of published forecasts based on the direct application of a complete statistical model of the economy. In the late I960s and early I970S confidence in forecasting was growing. 'Extra resources were put in, and there were hopes that the accumulation of data and more sophisticated techniques would lead to major improvements in accuracy of forecasts and understanding of the economy' (Burns, I986). This confidence rested in part on the wide acceptance of the neoclassical synthesis as a framework for macroeconomic analysis. The phrase originated with Samuelson, who was largely instrumental in constructing and promulgating the 'grand neoclassical synthesis', which was given considerable prominence in the third edition of his textbook. Here it was noted that economists, instead of being Keynesian or anti-Keynesian, 'have worked toward a synthesis of whatever is valuable in older economics and in modern theories of income determination. The result might be called neo-classical economics and is accepted in its broad outlines by all but about 5 per cent of extreme left wing