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Evaluating Macroeconomic Forecasts: A Review of Some Recent Developments

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  • 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)

  • Rianne Legerstee

    (Erasmus School of Economics, Erasmus University Rotterdam and Tinbergen Institute)

Abstract

Macroeconomic forecasts are frequently produced, widely published, intensively discussed and comprehensively used. The formal evaluation of such forecasts has a long research history. Recently, a new angle to the evaluation of forecasts has been addressed, and in this review we analyse some recent developments from that perspective. The literature on forecast evaluation predominantly assumes that macroeconomic forecasts are generated from econometric models. In practice, however, most macroeconomic forecasts, such as those from the IMF, World Bank, OECD, Federal Reserve Board, Federal Open Market Committee (FOMC) and the ECB, are typically based on econometric model forecasts jointly with human intuition. This seemingly inevitable combination renders most of these forecasts biased and, as such, their evaluation becomes non-standard. In this review, we consider the evaluation of two forecasts in which: (i) the two forecasts are generated from two distinct econometric models; (ii) one forecast is generated from an econometric model and the other is obtained as a combination of a model and intuition; and (iii) the two forecasts are generated from two distinct (but unknown) combinations of different models and intuition. It is shown that alternative tools are needed to compare and evaluate the forecasts in each of these three situations. These alternative techniques are illustrated by comparing the forecasts from the (econometric) Staff of the Federal Reserve Board and the FOMC on inflation, unemployment and real GDP growth. It is shown that the FOMC does not forecast significantly better than the Staff, and that the intuition of the FOMC does not add significantly in forecasting the actual values of the economic fundamentals. This would seem to belie the purported expertise of the FOMC.

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Bibliographic Info

Paper provided by Kyoto University, Institute of Economic Research in its series KIER Working Papers with number 771.

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Length: 28pages
Date of creation: Apr 2011
Date of revision:
Handle: RePEc:kyo:wpaper:771

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Keywords: Macroeconomic forecasts; econometric models; human intuition; biased forecasts; forecast performance; forecast evaluation; forecast comparison.;

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  1. Chia-Lin Chang & Philip Hans Franses & Michael McAleer, 2010. "How Accurate are Government Forecasts of Economic Fundamentals? The Case of Taiwan," KIER Working Papers, Kyoto University, Institute of Economic Research 720, Kyoto University, Institute of Economic Research.
  2. Roy Batchelor, 2007. "Forecaster Behaviour and Bias in Macroeconomic Forecasts," Ifo Working Paper Series Ifo Working Paper No. 39, Ifo Institute for Economic Research at the University of Munich.
  3. Christina D. Romer & David H. Romer, 2004. "A New Measure of Monetary Shocks: Derivation and Implications," American Economic Review, American Economic Association, American Economic Association, vol. 94(4), pages 1055-1084, September.
  4. Diebold, Francis X & Mariano, Roberto S, 1995. "Comparing Predictive Accuracy," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 13(3), pages 253-63, July.
  5. Kenneth D. West, 1994. "Asymptotic Inference About Predictive Ability," Macroeconomics, EconWPA 9410002, EconWPA.
  6. 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.
  7. Elliott, Graham & Timmermann, Allan G, 2007. "Economic Forecasting," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6158, C.E.P.R. Discussion Papers.
  8. Chong, Yock Y & Hendry, David F, 1986. "Econometric Evaluation of Linear Macro-Economic Models," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 53(4), pages 671-90, August.
  9. Philip Hans Franses & Michael McAleer & Rianne Legerstee, 2009. "Expert opinion versus expertise in forecasting," Statistica Neerlandica, Netherlands Society for Statistics and Operations Research, Netherlands Society for Statistics and Operations Research, vol. 63(3), pages 334-346.
  10. Timmermann, Allan, 2006. "Forecast Combinations," Handbook of Economic Forecasting, Elsevier, Elsevier.
  11. Christina D. Romer & David H. Romer, 2008. "The FOMC versus the Staff: Where Can Monetary Policymakers Add Value?," NBER Working Papers 13751, National Bureau of Economic Research, Inc.
  12. 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.
  13. 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.
  14. Batchelor, Roy, 2007. "Bias in macroeconomic forecasts," International Journal of Forecasting, Elsevier, Elsevier, vol. 23(2), pages 189-203.
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