Sunday, April 14, 2024

THE ISSUE: Central Bank getting help from US expert

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LAST WEEK it was revealed that a leading economic forecasting and econometric specialist from the United States (US) was in Barbados to help the Central Bank devise a new economic forecasting model.

Dr Neil Ericsson, who is principal economist in the international finance section of the US Federal Reserve System – the US Central Bank – confirmed his involvement, without going into detail, as he addressed a seminar hosted by the Department of Economics, University of the West Indies (UWI), Cave Hill Campus.

Forecasting is not an exact science, and those brave enough to predict the outcome of anything usually do so at the risk of getting it wrong.

Just ask the weatherman. The chance of getting it correct usually depends on the availability of important and reliable data.

As economic forecasting goes, no one predicted the financial meltdown and recession that crippled the world eight years ago, and the effects are arguably still felt by some countries.

Central Bank Governor, Dr DeLisle Worrell, examined the issue of economic forecasting in the Caribbean when he authored a policy paper in 1991 on the topic Economic Forecasting In The Caribbean: Options For Policymakers.

In that document, the respected Caribbean economist said: “Caribbean economists have experimented with economic models for many years, though there are still no structural econometric models in use for forecasting in the region.”

Worrell also noted that “the forecasting system used by the [International Monetary Fund], and the Economic Outlook, which is the forecast system actually used for policy forecasts in the Central Bank of Barbados, are both designed to address short term adjustment issues”, and “have nothing to say about the possibilities and policies for medium and long-term growth”.

He added: “Economic growth rates are exogenous in both frameworks, though they may be used to project the balance of payments consequences of a particular growth path and associated policies.”

“These systems may be used to measure the effects of changes in levels of taxation, government expenditure, government borrowing and foreign investment. They are weak in their handling of changes in interest rates, credit policy, non-tariff trade restrictions and exchange rates. They are highly sensitive to small variations in the ratios which they use to represent economic behaviour,” Worrell said.

Also adding to the literature on economic forecasting in the Caribbean was Dr Penelope Forde of the Central Bank of Trinidad and Tobago, who in a 1994 paper, Challenges And Problems In Forecasting Caribbean Economics: Some Data Issues, said there were six “major weaknesses”.

These were “timeliness of current output, the lack of new data series, inadequate periodicity, not enough transformations, short data sets, and the absence of forward looking indicators”.

“The Central Bank has done its part in the area of enhancing the economic data base by the compilation and publication of series on quarterly real GDP and quarterly balance of payments,” she said.

Using research on the US Federal Reserve’s method of forecasting, which he discussed with UWI economists, as an example, Ericsson said “standard approaches typically fail to detect biases or inefficiencies in the forecasts”.

“However, recently developed indicator saturation techniques find economically sizable and highly significant time varying biases that depend on the business cycle inter alia. Estimated biases differ not only over time and with the variable being forecast, but by country and across the forecast horizon,” the research stated.

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