"There has been an intense debate about the rationale behind economic prediction or forecasting, triggered by a sequence of forecast errors before and after the financial crisis and more recently by a ‘surprisingly’ buoyant economy after the referendum on the UK’s membership of the European Union. Some economists argue that the value of a forecast is strictly related to its forecast accuracy. Others argue that what matters is less the forecast errors but the stories that are revealed by such errors. The former might be thought to relate the value of economic forecasting solely in terms of a statistical criterion and the latter to the need to concentrate on structural relationships between economic variables that will be subject to errors (or shocks) but which can be treated as stable. I argue that the forecast process is inherently subject to large errors, and so is a hazardous exercise, but that does not by itself invalidate the exercise because both the producers and consumers of forecasts understand that errors will occur. And this knowledge throws up a clear obligation for producers to explain errors before the fact by use of uncertainty or scenario plots and for consumers to treat the forecasts with caution."
Extract from "Why Forecast?" , commentary by Prof. Jagjit S. Chadha, National Institute Economic Review, February 2017, no239
The Institute has been developing its analysis of economic prospects and the causes of change since its establishment in 1938. But this process was heightened with the publication of this Review from 1959. By November 1963 forecasts of GDP started to be published in the Review. And since then there has been an intense quarterly effort from economists running models, assessing data, understanding deviations of outcomes from expectations and applying judgement.
When the output is brought together, Institute staff start to make some sense of what has happened and think about what might happen. The main tool for forecasting is the National Institute Global Econometric Model (NiGEM) but many other models are used to check assumptions and cross-validate projections.
The Institute is at the centre of the national debate on the measurement and understanding of business cycle fluctuations. We start this process at the fundamental level. The UK has some excellent long run data on economic progress and some of the basic facts of business cycle peak and troughs have been explored in earlier work at the Institute. Chadha and Nolan (2002) explored the long run of the UK business cycle and presented some stylised facts on duration and the cyclical behaviour of macroeconomic aggregates.
The National Institute estimates a daily series of premia in sovereign bond yields for the Advanced EMU, UK and US economies.