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OECD Admits to Forecasting Errors During Financial Crisis

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Report offers new insights into the roots of the financial crisis.

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A new report released yesterday by the Organisation for Economic Co-operation and Development (OECD) admitted to large forecasting errors in economic projections made by the organization from 2007 to 2012, during the eurozone crisis.

Errors included underestimating the collapse in activity from 2008 to 2009, and overestimating the pace of recovery in the years following. The report blames the errors on extreme volatility experienced during the financial crisis. It said that the degree of forecasting errors was similar to that of errors made by the Organisation during the 1973 oil crisis.

OECD Chief Economist Pier Carlo Padoan addressed the root of the Organisation's recent forecasting problems at an event yesterday at the London School of Economics.

"The repeated deepening of the euro area sovereign debt crisis took us by surprise because of the stronger-than-expected feedback between banking and sovereign weaknesses, and this influenced our overestimation of projected growth during the early stages of the recovery," Padoan said.

The report explained that although forecasts were revised consistently and rapidly during the financial crisis, challenges were accentuated by a lack of timely data on important financial information and a narrow understanding of macro-financial linkages between different countries and economies.

The analysis (found here) helps clarify how the economic crisis affected different countries.

One takeaway is that forecast errors were larger in the most open economies (when observing trade and finance statistics), which, as the report suggests, shows globalization has made countries more connected to the worldwide economy and therefore more susceptible to external shocks than in the past.

Another takeaway suggested that financial factors need to be given more weight in economic models.

"We have learned a lot from the crisis," Padoan said. "We have taken steps to improve short-term forecasting models, construct better indicators of financial conditions, and explore the risks around our forecasts more systematically."



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