Forecasts and Sunspots: Looking Back for a Better Future

Some would argue that economic forecasts are about as accurate as soothsayers and weather forecasts. Yet central banks all around the world make such forecasts and use them when conducting monetary policy. In fact, countries with inflation targets (Canada, New Zealand, and the United Kingdom, for example) all base their policy actions on inflation forecasts. As Federal Reserve Chairman Alan Greenspan recently commented: “Implicit in any monetary policy action or inaction is an expectation of how the future will unfold, that is, a forecast.”