May 27, 2013

Incorporating uncertainty when predecting the future of the economy

Governments take into account the macroeconomic predictions made by economists when they make important decisions that affect all of us. For this reason, experts strive to find new ways of fine tuning their previsions in an attempt to produce the minimum possible number of deviations in them.
There are different methods that aid in predicting what will happen in the future. Nevertheless, these predictions do not usually take into account uncertainty, that is, “the lack of knowledge we have about what is going to happen, and which we cannot predict with the information that is available when we are making the prediction,” explains one of the authors of the study, Esther Ruiz, a tenured professor in UC3M’s Statistics Department. In practice, predictions to not have to be exact, and “intoducing uncertainty makes it possible to make more realistic forecasts,” she adds.