Bank of England chief economist: Economic forecasting 'in crisis'
Andrew Haldane says economists had been stuck in a “narrow and fragile” set of models which failed to take account of “irrational” real-world behaviour
Bank of England - credit: PA
The Bank of England’s chief economist has admitted that economic forecasting is “in crisis” following the financial crash alongside misjudgements about the short-term impact of the Brexit vote.
Andrew Haldane said the profession had had a “Michael Fish moment” by failing to foresee the collapse of investment bank Lehman Brothers.
He argued that economists had been stuck in a “narrow and fragile” set of models which failed to take account of “irrational” real-world behaviour.
Speaking at the Institute for Government yesterday, Haldane argued that weather forecasting had improved markedly since the failure to predict the massive storm of 1987, and argued that economists could do likewise.
“It’s a fair cop to say the profession is to some degree in crisis. It’s not the first time it has happened. It happened back in the 1930s and [during] the Great Depression,” he said.
“But out of that something good spread. It brought us [John Maynard] Keynes and the birth of modern macro-economics.
“Out of this crisis, there could be a rebirth of economics. I’m not someone who would say that all that’s been done in the past is terrible.
“It’s just that the models we had were rather narrow and fragile. The problem came when the world was tipped upside down and those models were ill-equipped to making sense of behaviours that were deeply irrational.”
However, on the question of Brexit he said the question was more one of “timing” than of a “fundamental reassessment of the fortunes of the economy”.
He said the Bank of England were still expecting a “material slowing” of consumer spending next year as inflation starts to chip away at spending power, although he admitted there was “huge amounts of uncertainty” about this view.
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