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An evaluation of recent macroeconomic forecast errors

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  • Scott Schuh
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    Abstract

    Despite a significant decline in the pace of economic growth in the second half of 2000, macroeconomic forecasters underpredicted real GDP growth and overpredicted the unemployment rate by a significant amount, for the fifth consecutive year. On average, real GDP forecasts were about 2 percentage points below the actual data for the 1996-2000 period, and unemployment rate forecasts about 0.5 percentage point above. On a more positive note, forecasters ended their chronic overprediction of inflation during much of this period. Nevertheless, surprisingly large and persistent errors in recent forecasts of GDP, inflation, and unemployment have perplexed macroeconomists and policymakers for quite some time, and they merit closer examination. ; This article evaluates forecast errors in an attempt to understand why recent forecasts have gone awry. The investigation centers on errors in forecasts of real GDP growth, inflation, the unemployment rate, and nominal and real short-term interest rates since 1969. The focus is on one-year-ahead forecasts because well-known lags in the effects of monetary policy require the Federal Reserve to forecast economic activity well ahead when setting its current interest rate target. In addition to studying average forecast errors, the author looks briefly at the time series properties of the work of some individual forecasters.

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    Bibliographic Info

    Article provided by Federal Reserve Bank of Boston in its journal New England Economic Review.

    Volume (Year): (2001)
    Issue (Month): ()
    Pages: 35-56

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    Handle: RePEc:fip:fedbne:y:2001:p:35-56:n:1

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    Keywords: Forecasting ; Gross domestic product ; Monetary policy ; Federal Reserve System ; Macroeconomics;

    References

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    1. John C. Robertson & Ellis W. Tallman, 1998. "Data vintages and measuring forecast model performance," Economic Review, Federal Reserve Bank of Atlanta, issue Q 4, pages 4-20.
    2. Dean Croushore & Tom Stark, 2000. "A real-time data set for macroeconomists: does data vintage matter for forecasting?," Working Papers 00-6, Federal Reserve Bank of Philadelphia.
    3. Prakash Loungani, 2000. "How Accurate Are Private Sector Forecasts--Cross-Country Evidence from Consensus Forecasts of Output Growth," IMF Working Papers 00/77, International Monetary Fund.
    4. Athanasios Orphanides, 2000. "Activist stabilization policy and inflation: the Taylor rule in the 1970s," Finance and Economics Discussion Series 2000-13, Board of Governors of the Federal Reserve System (U.S.).
    5. Lamont, Owen A., 2002. "Macroeconomic forecasts and microeconomic forecasters," Journal of Economic Behavior & Organization, Elsevier, vol. 48(3), pages 265-280, July.
    6. Evan F. Koenig & Sheila Dolmas & Jeremy Piger, 2003. "The Use and Abuse of Real-Time Data in Economic Forecasting," The Review of Economics and Statistics, MIT Press, vol. 85(3), pages 618-628, August.
    7. Victor Zarnowitz & Louis A. Lambros, 1987. "Consensus and Uncertainty in Economic Prediction," NBER Working Papers 1171, National Bureau of Economic Research, Inc.
    8. Keane, Michael P & Runkle, David E, 1990. "Testing the Rationality of Price Forecasts: New Evidence from Panel Data," American Economic Review, American Economic Association, vol. 80(4), pages 714-35, September.
    9. Zarnowitz, Victor & Lambros, Louis A, 1987. "Consensus and Uncertainty in Economic Prediction," Journal of Political Economy, University of Chicago Press, vol. 95(3), pages 591-621, June.
    10. Bonham, Carl & Cohen, Richard, 1995. "Testing the Rationality of Price Forecasts: Comment," American Economic Review, American Economic Association, vol. 85(1), pages 284-89, March.
    11. David Laster & Paul Bennett & In Sun Geoum, 1999. "Rational Bias In Macroeconomic Forecasts," The Quarterly Journal of Economics, MIT Press, vol. 114(1), pages 293-318, February.
    12. Victor Zarnowitz & Phillip Braun, 1993. "Twenty-two Years of the NBER-ASA Quarterly Economic Outlook Surveys: Aspects and Comparisons of Forecasting Performance," NBER Chapters, in: Business Cycles, Indicators and Forecasting, pages 11-94 National Bureau of Economic Research, Inc.
    13. Zarnowitz, Victor, 1985. "Rational Expectations and Macroeconomic Forecasts," Journal of Business & Economic Statistics, American Statistical Association, vol. 3(4), pages 293-311, October.
    14. Terence Lim, 2001. "Rationality and Analysts' Forecast Bias," Journal of Finance, American Finance Association, vol. 56(1), pages 369-385, 02.
    15. Tom Stark, 1997. "Macroeconomic forecasts and microeconomic forecasters in the Survey of Professional Forecasters," Working Papers 97-10, Federal Reserve Bank of Philadelphia.
    16. Stephen K. McNees, 1992. "How large are economic forecast errors?," New England Economic Review, Federal Reserve Bank of Boston, issue Jul, pages 25-42.
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    Cited by:
    1. Luis Fernando Melo & Héctor Núñez, . "Combinación de Pronósticos de la Inflación en Presencia de cambios Estructurales," Borradores de Economia 286, Banco de la Republica de Colombia.
    2. Fildes, Robert & Stekler, Herman, 2002. "Reply to the comments on 'The state of macroeconomic forecasting'," Journal of Macroeconomics, Elsevier, vol. 24(4), pages 503-505, December.
    3. Tim Willems & Sweder van Wijnbergen, 2009. "Imperfect Information, Lagged Labor Adjustment and the Great Moderation," Tinbergen Institute Discussion Papers 09-063/2, Tinbergen Institute, revised 18 Apr 2012.
    4. Sanders, Dwight R. & Manfredo, Mark R. & Boris, Keith, 2009. "Evaluating information in multiple horizon forecasts: The DOE's energy price forecasts," Energy Economics, Elsevier, vol. 31(2), pages 189-196.
    5. William T. Gavin & Rachel J. Mandal, 2002. "Evaluating FOMC forecasts," Working Papers 2001-005, Federal Reserve Bank of St. Louis.
    6. William T. Gavin, 2003. "FOMC forecast: is all the information in the central tendency?," Review, Federal Reserve Bank of St. Louis, issue May, pages 27-46.
    7. Carlos Capistrán & Gabriel López-Moctezuma, 2008. "Experts´ Macroeconomics Expectations: An Evaluation of Mexican Short-Run Forecasts," Working Papers 2008-11, Banco de México.

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