Sunday, May 21, 2017

The sandbox is not a broken model

Economic Forecasting Is Still Broken

According to central banker. See below to understand sandbox.
The Federal Reserve fared no better. As of December 2007, its main economic model saw a less-than-5-percent chance that the unemployment rate would be above 6 percent in two years. The rate actually hit 10 percent, an event that the model would have said was close to impossible. I believe it would have assigned an even lower probability to where we’ve ended up today, with real GDP more than 10 percent below 2007 forecasts.In other words, both private sector and Fed models viewed the events that unfolded over the next one, two and ten years as essentially impossible. My own sense is that the typical academic models were just as inaccurate. These kinds of errors suggest fundamental flaws in the way the models are built.So have economists used the subsequent decade to address the problem? So far, I’ve seen little response from academics. The public documentation for the Fed's baseline model does not reflect any material change of this kind. As of May 2017, the average participant in the Survey of Professional Forecasters saw only a 1-in-200 chance that the unemployment rate would increase by 2 percentage points over the next eighteen months -- a prediction that appears grounded in the same kind of risk modelling that was used in 2007.

The sandbox is the model, it is what auto cash does, and thus it is the economy  pricing process and so it is the best known real time economy available, and completely computable, just not computable by any secret segment of hedgers.

Pure cash is an odds making system, the Fed is dealing with the non-optimum term structure set by its major customer, the government.  Hence the Fed will always have a limited set of price trajectories it can observe, it shuts off anything that breaks the senate ten year budget. Without those observables, its model is foul.

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