Prediction: The Long and the Short of It

Antony Millner and Daniel Heyen

American Economic Journal: Microeconomics, 2021, vol. 13, issue 1, 374-98

Abstract: Commentators often lament forecasters' inability to provide precise predictions of the long-run behavior of complex economic and physical systems. Yet their concerns often conflate the presence of substantial long-run uncertainty with the need for long-run predictability; short-run predictions can partially substitute for long-run predictions if decision-makers can adjust their activities over time. So what is the relative importance of short- and long-run predictability? We study this question in a model of rational dynamic adjustment to a changing environment. Even if adjustment costs, discount factors, and long-run uncertainty are large, short-run predictability can be much more important than long-run predictability.

JEL-codes: D21 D81 D83 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (4)

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DOI: 10.1257/mic.20180240

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