Forecasting in the Presence of Instabilities: How We Know Whether Models Predict Well and How to Improve Them

This article provides guidance on how to evaluate and improve the forecasting ability of models in the presence of instabilities, which are widespread in economic time series. Empirically relevant examples include predicting the financial crisis of 2007–08, as well as, more broadly, fluctuations in asset prices, exchange rates, output growth, and inflation. In the context of unstable environments, I discuss how to assess models’ forecasting ability; how to robustify models’ estimation; and how to correctly report measures of forecast uncertainty. Importantly, and perhaps surprisingly, breaks in models’ parameters are neither necessary nor sufficient to generate time variation in models’ forecasting performance: thus, one should not test for breaks in models’ parameters, but rather evaluate their forecasting ability in a robust way. In addition, local measures of models’ forecasting performance are more appropriate than traditional, average measures. (JEL C51, C53, E31, E32, E37, F37)

JEL Classification System

The categories listed below are used to classify books, book reviews, journal articles, and dissertations indexed in JEL, JEL on CD, EconLit. New changes to the classification system appear as soon as possible on www.econlit.org . The JEL classification system may be used freely for scholarly purposes. We suggest the following format: “JEL: A10, B10, etc.”

Annotated Listing of New Books

Editor's Note Our policy is to annotate all English-language books on economics and related subjects that are sent to us. A very small number of foreign-language books are called to our attention and annotated by our consulting editors or others. Our staff does not monitor and order books published; therefore, if an annotation of a book does not appear six months after the publication date, please write to us or the publisher concerning the book.

Mass Atrocities and Their Prevention

Counting conservatively, data show about 100 million mass atrocity-related deaths since 1900. A distinct empirical phenomenon, mass atrocities are events of enormous scale, severity, and brutality, occur in wartime and in peacetime, are geographically widespread, occur with surprising frequency, under various systems of governance, and can be long-lasting in their effects on economic and human development, wellbeing, and wealth, more so when nonfatal physical injuries and mental trauma also are considered. As such, mass atrocities are a major economic concern. Given the multidisciplinary nature of the subject matter, the pertinent conceptual, theoretical, and empirical literatures are voluminous and widely dispersed, and have not been synthesized before from an economics point of view. We address two gaps: a “mass atrocities gap” in the economics literature and an “economics gap” in mass atrocities scholarship. Our goals are, first, to survey and synthesize for economists a broad sweep of literatures on which to base further work in this field and, second, for both economists and noneconomists to learn how economic inquiry contributes to understanding the causes and conduct of mass atrocities and, possibly, to their mitigation and prevention. In drawing on standard, behavioral, identity, social network, and complex systems economics, we find that the big puzzles of the “how” and “why” of mass atrocities, and mass participation therein, are being well addressed. While new research on such topics will be valuable, work should also progress to develop improved prevention approaches. (JEL D72, D74, K38, N40, Z13)

A Survey on Income Inequality in China

After China’s recent great success in eliminating absolute poverty, addressing relative income inequality becomes a more important issue. This survey finds that income inequality rapidly increased in the first three decades since 1978 but stabilized and slightly declined in the past decade, consistent with the well-known Kuznets hypothesis. In addition to documenting the trend and patterns over time and across groups and regions, seven sources of income inequality are systematically discussed with an effort to reconcile and extend the existing literature. Furthermore, a negative correlation is documented between income inequality and intergenerational mobility, consistent with the Great Gatsby curve observed in developed countries. (JEL D31, D63, O15, P36)

Book Review: The Great Reversal by Thomas Philippon

Thomas Philippon’s The Great Reversal: How America Gave Up on Free Markets is a remarkable piece of research that draws our attention to a timely and relevant issue: the rise of market power and its macroeconomic implications. The book documents the facts, offers a number of hypotheses to explain those facts, and discusses the policy interventions needed to remedy market power. This essay reviews the contribution of the book, especially the conceptual and empirical foundations that lead to the main conclusions. The main virtue of the book is to offer a wealth of facts and implications that highlight the different aspects of the evolution of market power. This essay also considers instances that permit an alternative viewpoint. First, I maintain that the reliance on concentration indices to measure market power can be misleading. Second, the essay argues that to date there is no evidence that bestows a different experience in the evolution of market power in Europe compared to the United States. Third, the book gives most air time to antitrust and merger review as the main cause. While antitrust is relevant, technological change is at least as, if not more, important for the observed rise of market power. This essay manifests that technological change has fundamental implications for welfare and therefore for policy intervention. (JEL D24, E22, G31, G34, K21, L13)

Book Reviews

Paul N. Courant of Edward M. Gramlich Distinguished University Professor and Provost Emeritus, University of Michigan reviews “Like Nobody’s Business: An Insider’s Guide to How US University Finances Really Work” by Andrew C. Comrie. The Econlit abstract of this book begins: “Discusses the essentials of university funding, reviewing the business and finances of higher education in terms of its six functional elements—state and trustee governance, university administration, teaching, research, public service, and students and the broader community.”

The Human Tide: A Review Essay

The Human Tide: How Population Shaped the Modern World, by Paul Morland, argues for the importance of demography in both historical events and our current situation. Intended for a general audience, the book traces demographic developments from the late eighteenth century, arguing that the timing and pace of demographic change helps to explain why some countries became powerful and others did not. The author continues the story into the twentieth century, discussing the changes in age structure and internal ethno-religious balances that are consequences of demographic patterns. Many readers will find the questions and themes in The Human Tide interesting. Unfortunately, the book misrepresents some research findings and is confused about important demographic concepts. The Human Tide deals with fundamental changes in human society over the past two centuries, but for a clear account of those changes, readers will have to go elsewhere. (JEL I12, J11, J13, J15, K37, N30)