Is accurate forecasting of economic systems possible?

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Abstract

Structural constancy, both across time and across variable conditions, is a necessary precondition for accurate forecasting. Physical systems exhibit structural constancy, but economic and social systems generally do not. In this paper we examine the effects of policy, technology, and price volatility in commodity markets on the relationship between soybean oil and petroleum prices. An early Energy Information Administration (EIA) forecast of soy-based biodiesel price projected a simple relationship between soybean oil demand and price into the future—a relationship that has little explanatory power over the recent price volatility in oilseed markets. We propose that structural inconstancy and new trading behavior better explain price movements in soybean oil, and we further argue that forecasters must invent new ways of addressing the fundamental epistemological challenge of structural inconstancy in economic and social systems.

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Correspondence to Jonathan G. Koomey.

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Scher, I., Koomey, J.G. Is accurate forecasting of economic systems possible?. Climatic Change 104, 473–479 (2011). https://doi.org/10.1007/s10584-010-9945-z

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Keywords

  • Gross Domestic Product
  • Commodity Market
  • Energy Information Administration
  • Energy Information Administration
  • Trading Behavior