t t mboweni : artistic science or scientific art? – the role of forecasting in monetary policy formulation address by mr t t mboweni, governor of the south african reserve bank, at the reuters economist of the year award, johannesburg, 6 september 2007. * * * honoured guests, ladies and gentlemen 1. introduction it is said that there are two kinds of economists : those who cannot forecast, and those who don ’ t know that they cannot forecast. we have to be thick - skinned to be economists as we are often the butt of jokes. apparently there are more jokes about economists than any other profession, except perhaps lawyers. it would appear that the negative perceptions that are held about economists can be blamed to a large extent on economic forecasters who, we are told, have accurately forecast eight of the last three recessions. but forecasting is not always a joke, and the quality of the contestants of the reuters economist of the year competition is testament to that. forecasting is a serious and integral part of economic life. any decision, whether an investment decision or a policy decision, or in fact any decision in life that involves taking a view on the future, has to be made on the basis of some forecast. so if we regard forecasting as a joke, then the joke is on us. unfortunately we do not have perfect foresight and therefore we will never be able to forecast perfectly. the best we can do is to strive to create forecasting models that are close approximations of reality which in turn provides a coherent and disciplined framework for making decisions. in my comments to you this morning, i will discuss the role of forecasting and how we use forecasts in the monetary policy decision - making process. 2. models and forecasts there are different ways we can go about generating forecasts. although there may be some forecasters who engage in pure guesswork or thumb - sucking, most forecasters would be informed by models with varying degrees of sophistication. these could vary from simple extrapolation of the past, to analysing current developments and assessing their implications for the future, to a more complex dynamic stochastic general equilibrium model, which is the latest fad among model builders. forecasting success, however, is not guaranteed by the level of sophistication of the model. the type of model we use would, to some extent, depend on the time horizon that we are interested in, as different models are better suited to

in supporting demand. but that is only if it is used prudently and has been used prudently. if the use of fiscal policy in the past has not been optimised – and that is often the case, with fiscal policy often being used for political ends rather than as an economic tool – then it is likely that fiscal policy has not only been ineffective in creating the conditions for sustainable growth, but that the opportunity to use it to support growth has also become significantly narrower. this is indeed the place where many emerging and developed nations now find themselves. today, we are seeing the limits of debt - fuelled growth. the world seems to need more and more debt to create less and less growth. that cannot go on. debt has a role in supporting growth but over - dependence on it, and its misuse, has repeatedly resulted in bad outcomes. therefore, we have to look at alternative means of creating more sustainable growth. one of those alternatives may be greater economic integration, regionally and globally. in fact, economic and financial integration, whether regional or global, has been occurring. as a result, it has become increasingly difficult for individual countries to determine their independent path to prosperity. while not downplaying the importance of keeping our house in order and the need to promote competitive and transparent economies, it is nevertheless bis central bankers ’ speeches obvious that the fates of economies are increasingly linked to those of others. integration has its benefits and it has its costs. in a world of low growth, the political rhetoric in some major economies has tended to focus more on the costs and less on the benefits. that is unfortunate, because given the current circumstances of the global economy, it is likely that we need deeper and fairer integration. for emerging economies in asia and latin america, the question for us is whether deeper economic and financial integration offers a feasible path towards unlocking sustainable growth of our economies? how do we mitigate the costs and maximise the benefits? the world bank theme paper for this conference provides a useful starting point for thinking about these issues. i will leave it to the learned speakers today to ponder on that. i will just briefly share my perspective on this issue with respect to asean and malaysia. asian regional economic and financial integration the asean economic community blueprint 2025 contains asean ’ s vision of regional economic and financial integration over the next 10 years. when it came to formulating the 2025 blueprint, the issue of the nature of integration has always been central