How to Make Models Worse

Eurointelligence explains How to Make Models Worse

A group of economists has written a letter to the European Commission that it should change its economic models to take climate policies into account. If climate were an important factor in macroeconomic performance over the forecasting horizon, usually a year or two, then so it should. But it isn't.

We are no slouches ourselves when it comes to criticising general equilibrium based economic models, the kind of which the Commission uses. Our argument is that these models are worse than useless. Not only do they get it wrong all the time. The massive forecasting errors guide policymakers into making wrong decisions. A specimen of one such Commission forecast came out yesterday. We recall an analyst – obviously not in the employ of the Commission – who once took it upon himself to check the forecast against the actual data. He came up with a correlation coefficient of zero. This is quite hard to achieve even if you tried to.