Mathematical Models and Economic Forecasting: Some Uses and Mis-Uses of Mathematics in Economics

Abstract

We consider three cases studies of the uses and mis-uses of mathematics in 8 economics and econometrics. The first concerns economic forecasting, where a 9 mathematical analysis is essential, and is independent of the specific forecast- 10 ing model and how the process being forecast behaves. The second concerns 11 model selection with more candidate variables than the number of observations. 12 Again, an understanding of the properties of extended general-to-specific pro- 13 cedures is impossible without advanced mathematical analysis. The third con- 14 cerns inter-temporal optimization and the formation of rational expectations, 15 where misleading results follow from present mathematical approaches for real- 16 istic economies. The appropriate mathematics remains to be developed, and may 17 end problem specific rather than generic.