"All models are wrong, but some are useful"
-George E.P. Box
Section heading, page 2 of Box's paper, "Robustness in the Strategy of Scientific Model Building"
Words we live by, see JP Morgan et al
From Marginal Evolution:
The concept of Great Moderation has blinded economic forecasters and had the GDP volatility date been extended to 1954 blunders in forecasts would not have been as drastic during the past ongoing Great Recession, writes New York Fed.
“[O]ur calculations suggest that the Great Recession was indeed entirely off the radar of a standard macroeconomic model estimated with data drawn exclusively from the Great Moderation. By contrast, the extreme events of 2008-09 are seen as far from impossible—if unlikely—by the same model when the shocks hitting the economy are gauged using data from a longer period 91954],” write Ging Cee Ng and Andrea Tambalotti from the NY Fed.
To quantify this conclusion, these economists have overplayed, against the actual GDP, probability scenarios that are based on two different beliefs.
One set of belief, prevalent prior to 2007, is that the Great Moderation has permanently changed the growth landscape of the US where mild oscillations in GDP now rule the roost [graph above]. Coined by James Stock of Harvard and Mark Watson of Princeton, the Great Moderation is a set of beliefs that rests on GDP data from circa 1985 to 2006 and is often articulated by the slogan that “this time is different”....MORE