First Principles

This chapter provides an overview of the main themes covered in the book. It revolves around three basic questions: First, what is being forecast? In this book, the focus is on forecasting macroeconomic variables. Aggregate changes are thus primarily of concern, with sectoral developments being considered only insofar as they have a significant impact at a more global level. These forecasts are underpinned by traditional macroeconomic analysis, especially as it relates to cyclical fluctuations and long-run growth theory (Section 1.1). Second, why forecast these variables? Forecasting as a specific professional activity has emerged for both intellectual and practical reasons. The latter have become increasingly important with the growing sophistication of modern economies. Indeed, forecasts constitute a convenient framework to bring together assessments of the future and to evaluate the consequences of possible decisions (Section 1.2). Third, how are forecasts produced? As a rule, a forecast combines informed judgement and model-based predictions. Well-digested information is key: the best forecaster is often the one with the most documented and sharpest reading of the facts. But the role of the model(s) is also essential: models impart a healthy dose of discipline and help draw lessons for the future from observations of the past. Finally, it is important to note that forecasting involves much more than merely coming up with a set of numbers. The forecaster must be able to explain how the numbers hang together, to weave a compelling story around them, to identify the risks surrounding the central scenario and to map out alternative courses of action (Section 1.3).