Are central banks getting it all wrong?
The world may have changed on August 9 last year as the credit crunch first bit, and even some policymakers are beginning to question whether the way they work out what’s happening in the economy is flawed.
The market upheavals which started a year ago have now spread to the wider economy. They are threatening to throw the industrialized world into recession but soaring fuel and food prices are pushing up inflation, preventing central banks from offering more succor.
Central bank forecasts this year have consistently been getting it wrong, underestimating how fast inflation would rise or how quickly economic growth would slow.
Many commentators and even some policymakers are now worried that central banks could be making the wrong decisions about interest rates because the tools they use for forecasting don’t pay enough attention to the real world.
“I am very struck by the value placed on little models that are never actually confronted with data from the real world,” said one G7 central banker paydayloans. “This is not science in my view.”
One argument is that models can be useless at economic turning points, the central banker told Reuters.
Instead of recognizing the economy is moving from growth into recession, the models can assume that everything is in balance. Many are linear and therefore may not account for a difference in the way in which economies act at different stages of the business cycle.
Models could also be misleading policymakers because some do not take account of the effect of changes in prices when a trigger point is reached. For example, the model could fail to highlight a step change in output growth that could occur if oil prices moved past a particular level.
Filed under: legal, technology by TheDoor