Forecasting: The MPS Model

Abstract

Modigliani studied statistics with Abraham Wald, who was also a mathematician, and a general equilibrium theorist. Modigliani taught econometrics and had the reputation of forming theories that clearly explain reality. His reputation as a forecaster started with early collaborative work with his teachers at the New School on the specification of international trade functions. By far, however, Modigliani’s work on the FRB-MIT-SSRC model, which took on a large-scale econometric view of the macro economy, is his most important contribution to econometric forecasting. In that model, Modigliani flirted with an early version of the Rational Expectation Hypothesis (REH). He made many econometric forecasts for foreign countries based on that model. We will discuss his essential contributions to forecasting in this chapter.