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Analyzing Macroeconomic Forecastability

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Abstract

This paper estimates, using stochastic simulation and a multicountry macroeconometric model, the fraction of the forecast-error variance of output changes and the fraction of the forecast-error variance of inflation that are due to unpredictable asset-price changes. The results suggest that between about 25 and 37 percent of the forecast-error variance of output growth over 8 quarters is due to asset-price changes and between about 33 and 60 percent of the forecast-error variance of inflation over 8 quarters is due to asset-price changes. These estimates provide limits to the accuracy that can be expected from macroeconomic forecasting.

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File URL: http://cowles.econ.yale.edu/P/cd/d17a/d1706.pdf
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Bibliographic Info

Paper provided by Cowles Foundation for Research in Economics, Yale University in its series Cowles Foundation Discussion Papers with number 1706.

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Length: 20 pages
Date of creation: Jun 2009
Date of revision: Aug 2010
Handle: RePEc:cwl:cwldpp:1706

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Postal: Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA

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Keywords: Macroeconomic forecasting; Recessions; Booms;

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References

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  1. James D. Hamilton, 2009. "Causes and Consequences of the Oil Shock of 2007-08," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 40(1 (Spring), pages 215-283.
  2. Ray C. Fair & Matthew D. Shapiro & Kathryn M. Dominguez, 1986. "Forecasting the Depression: Harvard Versus Yale," Cowles Foundation Discussion Papers 808, Cowles Foundation for Research in Economics, Yale University.
  3. Del Negro, Marco & Schorfheide, Frank & Smets, Frank & Wouters, Rafael, 2007. "On the Fit of New Keynesian Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 25, pages 123-143, April.
  4. Marcelle Chauvet & Simon Potter, 2001. "Forecasting recessions using the yield curve," Staff Reports 134, Federal Reserve Bank of New York.
  5. Peter Ireland, 1999. "A Method for Taking Models to the Data," Computing in Economics and Finance 1999 1233, Society for Computational Economics.
  6. Glenn D. Rudebusch & John C. Williams, 2007. "Forecasting recessions: the puzzle of the enduring power of the yield curve," Working Paper Series 2007-16, Federal Reserve Bank of San Francisco.
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Cited by:
  1. Fair, Ray C., 2012. "Has macro progressed?," Journal of Macroeconomics, Elsevier, vol. 34(1), pages 2-10.
  2. Ray C. Fair, 2010. "Possible Macroeconomic Consequences of Large Future Federal Government Deficits," NBER Chapters, in: Tax Policy and the Economy, Volume 25, pages 89-108 National Bureau of Economic Research, Inc.
  3. Ray C. Fair, 2009. "Has Macro Progressed?," Cowles Foundation Discussion Papers 1728, Cowles Foundation for Research in Economics, Yale University, revised Jul 2010.
  4. Ray C. Fair, 2010. "Estimated Macroeconomic Effects of the U.S. Stimulus Bill," Cowles Foundation Discussion Papers 1756, Cowles Foundation for Research in Economics, Yale University.

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