Methodological issues in forecasting: Insights from the egregious business forecast errors of late 1930

Abstract

This paper examines some economic forecasts made in late 1930 that were intended to predict economic activity in the United States in order to shed light on several methodological issues. We document that these forecasts were extremely optimistic, predicting that the recession in the US would soon end, and that 1931 would show a recovery. These forecasts displayed egregious errors, because 1931 witnessed the largest negative growth rate for the US economy in any year in the twentieth century. A specific question is what led forecasters to make such serious and substantial empirical errors. A second more general issue involves the methodology of forecasting. The 1930 forecasts were sometimes based on explicit analogies with previous serious business cycles. Modern forecasting approaches are based on techniques that may not be recognized as analogies. Using the 1930 forecasts, we examine the implicit-analogy content of forecasts, and what might render such implicit analogies valid or invalid. This 1930 forecast example also resonates beyond the confines of economic methodology because forecasts about the Great Depression are of continuing interest to the profession at large, and we produce a forecast series not previously available.Analogies, qualitative forecasts, great depression, forecast evaluation, business cycles,

Evaluation of the Inflation Forecasting Process of the Reserve Bank of India: A Text Analysis Approach

“…These paragraphs can be taken as a data, which qualitatively predicts future inflation outlook for the Indian economy. Goldfarb et al (2005) were the first who used an outlook scale to analyze the forecast error of economists during 1930s Great Depression in the USA. The method was later adopted by Lundquist and Stekler (2012) and Stekler and Symington (2016) to analyze economists' forecast leading to the great depression and to evaluate qualitative forecasts of the Federal Open Market Committee (FOMC) minutes respectively.…”

Was the deflation of the depression anticipated? An inference using real-time data

“…10 The qualitative forecasts came from The New York Times (NYT) and the Commercial and Financial Chronicle (CFC). 11 The method was developed by Goldfarb et al (2005), who only examined the 1929-30 forecasts, and used by Mathy and Stekler (2017) to evaluate the real-time nowcasts and forecasts for the entire recessionary phase of the Depression.…”

“…The qualitative statements in the two publications were scored by the system developed by Goldfarb et al (2005) by hand by the authors. Each statement was divided into two categories which were scored separately.…”

“…Figure 1 shows the relation between the nowcasts, the Federal Reserve Bulletin index, and the Index of Industrial Production for the same quarter and Figure 2 10 Several recent papers have shown that it is possible to convert qualitative statements into quantitative numbers and to obtain meaningful results. (See Balke and Petersen, 2002;Ericsson, 2016;Goldfarb et. al, 2005;Lundquist andStekler, 2012, andSymington, 2016).…”

“…First, we base our analysis on the use of qualitative forecasts to create quantitative scores based on the optimism or pessimism of business analysts during the Great Depression. This analysis is based on the paper by Goldfarb, Stekler, and (2005) paper in this journal. We also examine forecasting methods employed at the time to better simulate whether a forecast was possible in real time.…”