Practical Applications of Economics: An Empirical Science Capable of Forecasting Economic Events?

Abstract

Despite the assumptions of modern macroeconomic theory, the financial markets and the way that money is generated and distributed have a huge influence on the economy. “The financial system and the process of money creation are a source of instability in the economy,” says Sergio Focardi, Visiting Professor of Quantitative Finance at Stony Brook University .

Focardi discusses the article he co-wrote with Frank Fabozzi, Professor of Finance at EDHEC Business School and Editor of The Journal of Portfolio Management . They argue that investors need to understand the theoretical limitations of today’s economic theory and practice and why economic forecasts frequently do not capture reality. Given the limitations of the theory and the complexity of economies, asset managers need to be prudent and not ignore that crises will happen, Focardi and Fabozzi advise.