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Assessing the prudence of economic forecasts in the EU

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  • G. A. Christodoulakis

    (Manchester Business School, Manchester, UK)

  • E. C. Mamatzakis

    (Department of Economics, University of Piraeus, Piraeus, Greece)

Abstract

We estimate the EU Commission loss preferences for major economic forecasts of 12 Member States. Based on a recently proposed method by Elliott, Komunjer and Timmermann (2005) the paper provides evidence of asymmetries in the underlying forecast loss preference of the Commission that tend to vary across Member States. In some cases, our results show that EU forecasts tend to display a rather optimistic picture for main economic variables, e.g. government balance, thus allowing a certain degree of leeway in the fiscal adjustment path towards the medium-term objective of 'close to balance' or 'in surplus' of the recently revised Stability and Growth Pact. Over the period of our sample, 1970-2004, this apparent asymmetry in the underlying loss preferences tends to deter prudent advice over economic policy. Lastly, we provide an analysis on the trade-off between loss and distribution asymmetries, for which simulation results show that the testing method is robust in the presence of skewness. Copyright © 2009 John Wiley & Sons, Ltd.

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Bibliographic Info

Article provided by John Wiley & Sons, Ltd. in its journal Journal of Applied Econometrics.

Volume (Year): 24 (2009)
Issue (Month): 4 ()
Pages: 583-606

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Handle: RePEc:jae:japmet:v:24:y:2009:i:4:p:583-606

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  1. Philippe Jorion & William N. Goetzmann, 1998. "Re-Emerging Markets," Yale School of Management Working Papers ysm111, Yale School of Management.
  2. Philippe Jorion & William N. Goetzmann, 1999. "Global Stock Markets in the Twentieth Century," Journal of Finance, American Finance Association, vol. 54(3), pages 953-980, 06.
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  5. Artis, Michael J & Marcellino, Massimiliano, 1999. "Fiscal Forecasting: the Track Record of the IMF, OECD, and EC," CEPR Discussion Papers 2206, C.E.P.R. Discussion Papers.
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  7. Veronesi, Pietro, 2004. "The Peso problem hypothesis and stock market returns," Journal of Economic Dynamics and Control, Elsevier, vol. 28(4), pages 707-725, January.
  8. Graham Elliott & Allan Timmermann & Ivana Komunjer, 2005. "Estimation and Testing of Forecast Rationality under Flexible Loss," Review of Economic Studies, Oxford University Press, vol. 72(4), pages 1107-1125.
  9. Christodoulakis, George A., 2005. "Financial forecasts in the presence of asymmetric loss aversion, skewness and excess kurtosis," Finance Research Letters, Elsevier, vol. 2(4), pages 227-233, December.
  10. Donald, Stephen G. & Whitney Newey, 1999. "Choosing the Number of Instruments," Working papers 99-05, Massachusetts Institute of Technology (MIT), Department of Economics.
  11. Michael J. Artis, 1996. "How Accurate Are the Imf's Short-Term Forecasts? Another Examination of the World Economic Outlook," IMF Working Papers 96/89, International Monetary Fund.
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Cited by:
  1. Javier J. Perez & Rossana Merola, 2012. "Fiscal forecast errors: governments vs independent agencies?," EcoMod2012 4694, EcoMod.
  2. Jörg Döpke & Ulrich Fritsche & Boriss Siliverstovs, 2010. "Evaluating German business cycle forecasts under an asymmetric loss function," OECD Journal: Journal of Business Cycle Measurement and Analysis, OECD Publishing,CIRET, vol. 2010(1), pages 1-18.
  3. Merola, Rossana & Pérez, Javier J., 2013. "Fiscal forecast errors: Governments versus independent agencies?," European Journal of Political Economy, Elsevier, vol. 32(C), pages 285-299.
  4. Christian Pierdzioch & Jan C Rülke & Georg Stadtmann, 2012. "Forecasting the Dollar/British Pound Exchange Rate: Asymmetric Loss and Forecast Rationality," Economics Bulletin, AccessEcon, vol. 32(3), pages A213.
  5. Ulrich Fritsche & Christian Pierdzioch & Jan-Christoph Ruelke & Georg Stadtmann, 2012. "Forecasting the Brazilian Real and the Mexican Peso: Asymmetric Loss, Forecast Rationality, and Forecaster Herding," Macroeconomics and Finance Series 201202, Hamburg University, Department Wirtschaft und Politik.
  6. Rossana Merola & Javier J. Pérez, 2012. "Fiscal forecast errors: governments vs independent agencies?," Banco de Espa�a Working Papers 1233, Banco de Espa�a.
  7. Deschamps, Bruno & Ioannidis, Christos, 2013. "Can rational stubbornness explain forecast biases?," Journal of Economic Behavior & Organization, Elsevier, vol. 92(C), pages 141-151.
  8. Ulrich Fritsche & Christian Pierdzioch & Jan-Christoph Ruelke & Georg Stadtmann, 2012. "Forecasting the Euro: Do Forecasters Have an Asymmetric Loss Function?," Macroeconomics and Finance Series 201201, Hamburg University, Department Wirtschaft und Politik.
  9. Christodoulakis, George & Mamatzakis, Emmanuel, 2013. "Behavioural asymmetries in the G7 foreign exchange market," International Review of Financial Analysis, Elsevier, vol. 29(C), pages 261-270.
  10. Mamatzakis, E. & Koutsomanoli-Filippaki, A., 2014. "Testing the rationality of DOE's energy price forecasts under asymmetric loss preferences," Energy Policy, Elsevier, vol. 68(C), pages 567-575.
  11. Tsuchiya, Yoichi, 2012. "Evaluating Japanese corporate executives’ forecasts under an asymmetric loss function," Economics Letters, Elsevier, vol. 116(3), pages 601-603.

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