The Uncertain Side of Econometrics

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2022-06-21 16:00:19

Financial media, central bankers and even most of the economists talk about various economic parameter estimates as if they are certainties. For instance, you always hear things like “the last quarter GDP growth was at 1.2%”, “inflation is highest since 1985”, etc. In this post I look into different types of uncertainty that comes with economic estimates, namely GDP growth, unemployment rate and CPI.

The GDP growth number that is reported in financial media at the start of a quarter is released by the Bureau of Economic Analysis (BEA) and it is just a first estimate. It is made with about 25% of the data still missing (since the data in the service sector is not yet available). The missing data is extrapolated from the past trends. As the data continues to arrive the estimates are updated and reported as second and third estimates that are made two and three months after the initial release. It is also possible to see the most recent estimates as of today. Fixler et al. (2011) report the mean absolute revision (MAR) for annualized quarterly estimates to be 1.31 (advance), 1.29 (second) and 1.32% (third). When it comes to extreme cases Òscar Jordà et al. (2020) note that:

…fourth quarter of 2008 … initially listed at -3.8% annual rate … revised down … to an eye-watering -8.4% annual rate … had officials known the actual depth of the recession in real time, they might have voted for a larger fiscal stimulus package, for example.

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