Empirical paper assignment - Essay Example

The accuracy of estimation is subject to various factors some of which are beyond control of economists. However in most cases there are counterweights that help balance an error in estimation. This means that in a normal estimation there are over and underestimations that cancel out partially or completely. The fact that stands out in the economists’ estimation is that these overestimations occur year after year and indications point at misinformed estimates. Overestimation of interest rates on government bonds has some serious results.

Higher borrowing costs imply that the government sets aside more funds to cover this cost. The end effect is that the government will reduce budgets for other functions and allocate more funds for paying up its public debt. According to the article, economists have a duty come up with ways to increase economic growth. The reasons for this overestimation could be an increase in the amount of funds available for borrowing and to avert any stagnation of bond rates. According to Jared, increased funds available for loaning have the effect of pushing down the costs of borrowing.

This can only mean that the estimation techniques used by the economist could be overlooking the increase. Secondly, cost of borrowing is reduced by economic forecasts that indicate growths and inflation. In instances where inflation or reduced economic growth is predicted, costs of borrowing fall. In order to prevent this fall, economists overestimate bond rates so that this acts as a stimulant that will prevent significant drop in borrowing rates. Another aspect of effects of bond rates overestimation is that they give a wrong impression of economic performance.

The cost of borrowing influences calculations on Gross Domestic Product since in effect it influences the rate of economic growth. Later in this assignment we shall have a graphical representation of the public debt expressed as a