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Special Event

Greenspan Speaks to National Association for Business Economics

Aired March 27, 2001 - 8:45 a.m. ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

COLLEEN MCEDWARDS, CNN ANCHOR: We want to take you live now to Washington, where Federal Reserve Chairman Alan Greenspan is about to make some remarks to the National Association for Business Economics.

When he cut interest rates by half a point last week, he did leave the door open for more, saying the Fed is willing to step in to stop the economy from falling further, so we're listening for any signs on that, and the markets are listening as well.

Let's listen to a little bit of this and see what he has to say.

(JOINED IN PROGRESS)

ALAN GREENSPAN, CHAIRMAN, FEDERAL RESERVE BOARD: I understood you, which I suspect is already one leg up.

I'm certainly pleased to join all of you, and I see a lot of very familiar faces, which continuously do not change but the hairdo does over the decades.

I have seen pictures of myself as president of NABE in 1970. I did look different at the time.

Anyway, I am certainly pleased to have this opportunity to address an issue of considerable importance to both business economists and, obviously, policymakers; that is the challenge of measuring and modeling our dynamic economy. Moreover, I would like to raise an issue of how much of our finite resources should be directed to measuring and how much to modeling.

Business economics endeavors to understand the structure of an economy, how it works and, above all, how to forecast it. As you all know, it is a bedeviling job because the future, at root, cannot be foretold. The best we can do is to construct probabilistic models that can inform the decisions of business executives and, of course, economic policymakers, who, of necessity, will be making their decisions armed with incomplete information.

For a while in the 1960s, we were increasingly mesmerized by the possibilities of econometric models as a crystal ball.

However, history was not entirely kind to this endeavor. For one thing, especially against the backdrop of the inflation of the following decade, it soon became apparent that our theories of the macroeconomy were woefully inadequate.

For another, even leaving aside the shortcomings of our theory, we soon learned that the economic structure did not hold still long enough to capture its key relationships.

Its changing structure frustrated efforts to isolate a reasonably fixed set of coefficients. In turn, the absence of fixed coefficients undermined the usefulness of the model as a basis for projecting the future.

Econometricians recognized many of these difficulties, and so developed a vast and elegant literature in support of this research program, covering a spectrum of topics ranging from maximum likelihood estimation techniques to tests for coefficient stability, to diagnostics for detecting undesirable properties of the errors of these equations.

MCEDWARDS: All right, you're listening to Federal Reserve Chairman Alan Greenspan speaking to the National Association for Business Economics -- he's a man who knows only too well the difficult of economic forecasting, saying that economists should improve forecasting data. And he was talking about the state of economy, as well. This is a conference he's speaking to on the national economy policy and how it's affected by interest rates and other things.

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