Why were economists’ forecasts in the Covid pandemic so badly wrong?

Tim Congdon ()

Chapter 4 in Money and Inflation at the Time of Covid, 2025, pp 123-151 from Edward Elgar Publishing

Abstract: Virtually the entire macroeconomic forecasting fraternity – in central banks, finance ministries, universities and so on, and across the developed world – was wrong about inflation in the early 2020s. The chapter argues that the trouble arose from excluding monetary influences on the economy, including those which arise from the stationarity (or mean-reversion) of changes in the income velocity of broad money. When the quantity of money changes sharply, either upwards or downwards, the economy suffers from “monetary disequilibrium”. Agents hold too much or too little money relative to their spending and asset portfolios, with profound effects on future behaviour. As the standard macroeconomic models have no role for money and do not incorporate these effects, the models suffer from a major structural flaw. In the UK the models’ failure in the early 2020s was similar to their earlier failures in the boom–bust cycles of the late twentieth century.

Keywords: Bank of England; Treasury; Ben Bernanke; Stationary series; Income velocity; Financialization (search for similar items in EconPapers)
Date: 2025
ISBN: 9781035328963
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