Economic Shocks

Economists talk frequently about economic shocks, but their thinking is a bit confused.

In econometrics—the application of rigorous statistical methods to economic data, the properties of error terms—the difference between the out-turn and the forecast were critical. In macroeconomics, the error terms were rebranded as “shocks”. But if the “shock” is simply the deviation between the prediction of the model and the reality of the world, we learn nothing by attaching the label "shock” to these error terms. To go further we have to be able to gain insight into the origins of the shocks (John Kay and Mervyn King – Radical Uncertainty p.346).