Tuesday, October 16, 2007

Greenspan on Data and Models

Michael Kinsley reviews Alan Greenspan's book (which I have not yet read). This passage from the review caught my eye:

You gotta love a guy whose idea of an important life lesson is: “I have always argued that an up-to-date set of the most detailed estimates for the latest available quarter is far more useful for forecasting accuracy than a more sophisticated model structure.” Words to live by.
Mike thinks Alan is being hopelessly geeky here. But I think Alan is talking to geeks like me, and also those who used to work for him on the staff of the Federal Reserve.
Modern macroeconomists have spent a lot of effort trying to develop better models of the economy for forecasting and policy analysis. Just look at any issue of the Journal of Monetary Economics or the Journal of Money, Credit, and Banking. Alan seems to be saying that our efforts have, to some degree, been misdirected. Better monetary policy, he suggests, is more likely to follow from better data than from better models. Relatively little modern macro has been directed at improving data sources. Perhaps that is a mistake.