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Forecast errors and financial developments

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  • Palle S. Andersen
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    Abstract

    As central banks have moved towards a forward-looking implementation of monetary policy, the role of forecasts in the policy process has greatly increased. Against this background, this paper looks at the accuracy of forecasts and, more specifically, addresses the question whether forecasts of growth and inflation can be improved by including information from financial markets. The empirical work presented suggests that average forecast errors are not large enough to seriously undermine the basis for forward-looking monetary policies, except in periods of common shocks and at cyclical turning points. It also appears that unexpected changes in non-financial variables are the primary source of forecast errors. Nonetheless, for several countries, forecasts could also be improved by using the information contents of changes in the yield curve and of movements in exchange rates and other asset prices.

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    Bibliographic Info

    Paper provided by Bank for International Settlements in its series BIS Working Papers with number 51.

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    Length: 61 pages
    Date of creation: Nov 1997
    Date of revision:
    Handle: RePEc:bis:biswps:51

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    1. Lamont, Owen A., 2002. "Macroeconomic forecasts and microeconomic forecasters," Journal of Economic Behavior & Organization, Elsevier, vol. 48(3), pages 265-280, July.
    2. Josef Baumgartner & Ramana Ramaswamy, 1996. "Inflation Targeting in the United Kingdom," IMF Working Papers 96/44, International Monetary Fund.
    3. Granger, Clive W J, 1996. "Can We Improve the Perceived Quality of Economic Forecasts?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(5), pages 455-73, Sept.-Oct.
    4. Henri Bernard & Stefan Gerlach, 1996. "Does the term structure predict recessions? The international evidence," BIS Working Papers 37, Bank for International Settlements.
    5. Stephen K. McNees, 1992. "How large are economic forecast errors?," New England Economic Review, Federal Reserve Bank of Boston, issue Jul, pages 25-42.
    6. Ellis W. Tallman & Naveen Chandra, 1997. "Financial Aggregates as Conditioning Information for Australian Output and Inflation," RBA Research Discussion Papers rdp9704, Reserve Bank of Australia.
    7. Stephen K. McNees, 1987. "Forecasting cyclical turning points: the record in the past three recessions," New England Economic Review, Federal Reserve Bank of Boston, issue Mar, pages 31-40.
    8. Horioka, C.Y., 1995. "Capital Gains in Japan: Their Magnitude and Imact on Consumption," ISER Discussion Paper 0388, Institute of Social and Economic Research, Osaka University.
    9. Stephen K. McNees, 1987. "Consensus forecasts: tyranny of the majority?," New England Economic Review, Federal Reserve Bank of Boston, issue Nov, pages 15-21.
    10. Tzavalis, E. & Wickens, M.R., 1995. "Forecasting Inflation from the Term Structure," Discussion Papers 9519, Exeter University, Department of Economics.
    11. Hamilton, James D & Gang, Lin, 1996. "Stock Market Volatility and the Business Cycle," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(5), pages 573-93, Sept.-Oct.
    12. Luis Catão & Ramana Ramaswamy, 1995. "Recession and Recovery in the United Kingdom in the 1990'+L927s," IMF Working Papers 95/40, International Monetary Fund.
    13. Stephen K. McNees, 1992. "The 1990-91 recession in historical perspective," New England Economic Review, Federal Reserve Bank of Boston, issue Jan, pages 3-22.
    14. Stephen K. McNees & Lauren K. Fine, 1994. "Diversity, uncertainty, and accuracy of inflation forecasts," New England Economic Review, Federal Reserve Bank of Boston, issue Jul, pages 33-44.
    15. Stephen K. McNees, 1995. "Assessment of the "official" economic forecasts," New England Economic Review, Federal Reserve Bank of Boston, issue Jul, pages 13-23.
    16. Nathan S. Balke & Mark A. Wynne, 1995. "Are deep recessions followed by strong recoveries? Results for the G-7 countries," Working Papers 9509, Federal Reserve Bank of Dallas.
    17. 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.
    18. Ken Holden & John Thompson, 1997. "Combining forecasts, encompassing and the properties of UK macroeconomic forecasts," Applied Economics, Taylor & Francis Journals, vol. 29(11), pages 1447-1458.
    19. Stephen G. Cecchetti, 1995. "Inflation Indicators and Inflation Policy," NBER Working Papers 5161, National Bureau of Economic Research, Inc.
    20. Charles Steindel, 1992. "Changes in the U.S. cycle: shifts in capital spending and balance sheet changes," Research Paper 9224, Federal Reserve Bank of New York.
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    Cited by:
    1. Hukkinen, Juhana & Viren, Matti, 1998. "How to Evaluate the Forecasting Performance of a Macroeconomic Model," Research Discussion Papers 5/1998, Bank of Finland.
    2. Michael G Papaioannou & Joonkyu Park & Jukka Pihlman & Han van der Hoorn, 2013. "Procyclical Behavior of Institutional Investors During the Recent Financial Crisis," IMF Working Papers 13/193, International Monetary Fund.
    3. Matti Virén, 1998. "OECD Forecasts for the G7 Countries in 1969 - 1997," Discussion Papers 187, Government Institute for Economic Research Finland (VATT).

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