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How Accurate are Government Forecasts of Economic Fundamentals? The Case of Taiwan

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Author Info

  • Chia-Lin Chang

    (Department of Applied Economics, National Chung Hsing University)

  • Philip Hans Franses

    (Econometric Institute, Erasmus School of Economics, Erasmus University Rotterdam)

  • Michael McAleer

    (Erasmus University Rotterdam, Tinbergen Institute, The Netherlands, and Institute of Economic Research, Kyoto University)

Abstract

A government's ability to forecast key economic fundamentals accurately can affect business confidence, consumer sentiment, and foreign direct investment, among others. A government forecast based on an econometric model is replicable, whereas one that is not fully based on an econometric model is non-replicable. Governments typically provide non-replicable forecasts (or, expert forecasts) of economic fundamentals, such as the inflation rate and real GDP growth rate. In this paper, we develop a methodology to evaluate non-replicable forecasts. We argue that in order to do so, one needs to retrieve from the non-replicable forecast its replicable component, and that it is the difference in accuracy between these two that matters. An empirical example to forecast economic fundamentals for Taiwan shows the relevance of the proposed methodological approach. Our main finding is that it is the undocumented knowledge of the Taiwanese government that reduces forecast errors substantially.

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Bibliographic Info

Paper provided by Kyoto University, Institute of Economic Research in its series KIER Working Papers with number 720.

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Length: 23pages
Date of creation: Aug 2010
Date of revision:
Handle: RePEc:kyo:wpaper:720

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Keywords: Government forecasts; generated regressors; replicable government forecasts; non- replicable government forecasts; initial forecasts; revised forecasts;

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References

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  1. McAleer, Michael, 1992. "Efficient Estimation: The Rao-Zyskind Condition, Kruskal's Theorem and Ordinary Least Squares," The Economic Record, The Economic Society of Australia, The Economic Society of Australia, vol. 68(200), pages 65-72, March.
  2. Oxley, Les & McAleer, Michael, 1993. " Econometric Issues in Macroeconomic Models with Generated Regressors," Journal of Economic Surveys, Wiley Blackwell, Wiley Blackwell, vol. 7(1), pages 1-40.
  3. Todd E. Clark & Michael W. McCracken, 1999. "Tests of equal forecast accuracy and encompassing for nested models," Research Working Paper, Federal Reserve Bank of Kansas City 99-11, Federal Reserve Bank of Kansas City.
  4. Philip Hans Franses & Rianne Legerstee, 2010. "Do experts' adjustments on model-based SKU-level forecasts improve forecast quality?," Journal of Forecasting, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 29(3), pages 331-340.
  5. Fildes, Robert & Goodwin, Paul & Lawrence, Michael & Nikolopoulos, Konstantinos, 2009. "Effective forecasting and judgmental adjustments: an empirical evaluation and strategies for improvement in supply-chain planning," International Journal of Forecasting, Elsevier, Elsevier, vol. 25(1), pages 3-23.
  6. Goodwin, Paul, 2000. "Improving the voluntary integration of statistical forecasts and judgment," International Journal of Forecasting, Elsevier, Elsevier, vol. 16(1), pages 85-99.
  7. Franses, Ph.H.B.F. & McAleer, M.J. & Legerstee, R., 2008. "Expert opinion versus expertise in forecasting," Econometric Institute Research Papers EI 2008-30, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
  8. Diebold, Francis X & Mariano, Roberto S, 2002. "Comparing Predictive Accuracy," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 20(1), pages 134-44, January.
  9. Pagan, Adrian, 1984. "Econometric Issues in the Analysis of Regressions with Generated Regressors," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 25(1), pages 221-47, February.
  10. Patton, Andrew J. & Timmermann, Allan, 2007. "Testing Forecast Optimality Under Unknown Loss," Journal of the American Statistical Association, American Statistical Association, American Statistical Association, vol. 102, pages 1172-1184, December.
  11. Mcleer, M. & Mckenzie, C.R., 1989. "When Are Two Step Estimators Efficient?," Papers, Australian National University - Department of Economics 179, Australian National University - Department of Economics.
  12. Kenneth D. West & Todd Clark, 2006. "Approximately Normal Tests for Equal Predictive Accuracy in Nested Models," NBER Technical Working Papers 0326, National Bureau of Economic Research, Inc.
  13. Allan Timmermann & Andrew Patton, 2004. "Properties of Optimal Forecasts under Asymmetric Loss and Nonlinearity," Working Papers, Warwick Business School, Finance Group wp04-05, Warwick Business School, Finance Group.
  14. Fiebig, Denzil G. & McAleer, Michael & Bartels, Robert, 1992. "Properties of ordinary least squares estimators in regression models with nonspherical disturbances," Journal of Econometrics, Elsevier, Elsevier, vol. 54(1-3), pages 321-334.
  15. Franses, Philip Hans & Legerstee, Rianne, 2009. "Properties of expert adjustments on model-based SKU-level forecasts," International Journal of Forecasting, Elsevier, Elsevier, vol. 25(1), pages 35-47.
  16. Franses, Philip Hans, 2008. "Merging models and experts," International Journal of Forecasting, Elsevier, Elsevier, vol. 24(1), pages 31-33.
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