What Is Econometric Modeling And Forecasting?

In earlier era, economists tried to peer into future by looking at easily available data on items like money, boxcar loadings, and steel production. For example, a drop in steel production was a sign that businesses had reduced purchases and that the economy would soon slow down. Eventually this process was formalized by combining several different statistics into an index of leading indicators. While it is not infallible, the index does give an early and mechanical warning on whether the economy is heading up or down.

For a more detailed look into the future, economists turn to computerized econometric forecasting models. An econometric model is a set of equations, representing the behavior of the economy that has been estimated using historical data. Early pioneers in this area were Jan Tin Bergen of the Netherlands and Lawrence Klein of the University of Pennsylvania both winners of the Noble Prize for their development of empirical macroeconomic models. Today, there is an entire industry of econometricians estimating macroeconomic models and forecasting the future of the economy. Finally the whole model is put together and run as a system of equations.