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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: Yale University, Box 208281, New Haven, CT 06520-8281 USA
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Web page: http://cowles.econ.yale.edu/
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Postal: Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA

Related research

Keywords: Macroeconomic forecasting; Recessions; Booms;

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References

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  1. Ray C. Fair & Matthew D. Shapiro & Kathryn M. Dominguez, 1989. "Forecasting the Depression: Harvard Versus Yale," NBER Working Papers 2095, National Bureau of Economic Research, Inc.
  2. Peter N. Ireland, 1999. "A method for taking models to the data," Working Paper 9903, Federal Reserve Bank of Cleveland.
  3. Marcelle Chauvet & Simon Potter, 2005. "Forecasting recessions using the yield curve," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 24(2), pages 77-103.
  4. 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.
  5. 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.
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Cited by:
  1. 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.
  2. Ray C. Fair, 2009. "Has Macro Progressed?," Cowles Foundation Discussion Papers 1728, Cowles Foundation for Research in Economics, Yale University, revised Jul 2010.
  3. 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.
  4. Fair, Ray C., 2012. "Has macro progressed?," Journal of Macroeconomics, Elsevier, vol. 34(1), pages 2-10.

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