Advanced Search
MyIDEAS: Login to save this paper or follow this series

Rational vs. Professional Forecasts

Contents:

Author Info

  • João Valle e Azevedo
  • João Tovar Jalles

Abstract

We compare theoretical and empirical forecasts computed by rational agents living in a model economy to those produced by professional forecasters. We focus on the variance of the prediction errors as a function of the forecast horizon and analyze the speed with which it converges to a constant (which can be seen as a measure of the speed of convergence of the economy to the steady state). We look at a standard sticky-prices-wages model, concluding that it delivers a strong theoretical forecastability of the variables under scrutiny, at odds with the data (professional forecasts). The flexible prices-wages version delivers a forecastability closer to the data and performs relatively better empirically (with actual data), but mainly because forecasts deviate little from the unconditional mean. These results can be interpreted in at least two ways: first, actual deviations from the steady-state are not persistent, in which case the implications of the specific formulation of nominal rigidities for short-run dynamics are unrealistic; second, and still looking through the lens of a model, exogenous (or unmodelled) steady-state shifts attributable to, e.g., changes in monetary-policy, taxation, regulation or in the growth of the technological frontier, occur in such a way as to strongly limit the performance of professional forecasters. �

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.bportugal.pt/en-US/BdP%20Publications%20Research/wp201114.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Banco de Portugal, Economics and Research Department in its series Working Papers with number w201114.

as in new window
Length:
Date of creation: 2011
Date of revision:
Handle: RePEc:ptu:wpaper:w201114

Contact details of provider:
Postal: R. do Ouro, 27, 1100 LISBOA
Phone: 21 321 32 00
Fax: 21 346 48 43
Email:
Web page: http://www.bportugal.pt
More information through EDIRC

Related research

Keywords:

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Jon Faust & Jonathan H. Wright, 2007. "Comparing Greenbook and Reduced Form Forecasts using a Large Realtime Dataset," NBER Working Papers 13397, National Bureau of Economic Research, Inc.
  2. Adolfson, Malin & Laséen, Stefan & Lindé, Jesper & Villani, Mattias, 2007. "Evaluating An Estimated New Keynesian Small Open Economy Model," CEPR Discussion Papers 6027, C.E.P.R. Discussion Papers.
  3. Faust, Jon & Wright, Jonathan H., 2008. "Efficient forecast tests for conditional policy forecasts," Journal of Econometrics, Elsevier, Elsevier, vol. 146(2), pages 293-303, October.
  4. Peter N. Ireland, 2006. "Changes in the Federal Reserve's Inflation Target: Causes and Consequences," NBER Working Papers 12492, National Bureau of Economic Research, Inc.
  5. Adolfson, Malin & Laséen, Stefan & Lindé, Jesper & Villani, Mattias, 2005. "Bayesian Estimation of an Open Economy DSGE Model with Incomplete Pass-Through," Working Paper Series 179, Sveriges Riksbank (Central Bank of Sweden).
  6. Rubaszek, Michal & Skrzypczynski, Pawel, 2008. "On the forecasting performance of a small-scale DSGE model," International Journal of Forecasting, Elsevier, Elsevier, vol. 24(3), pages 498-512.
  7. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 2001. "Nominal rigidities and the dynamic effects of a shock to monetary policy," Working Paper 0107, Federal Reserve Bank of Cleveland.
  8. Carl S Bonham & Richard H Cohen, 2000. "To Aggregate, Pool, or Neither: Testing the Rational Expectations Hypothesis Using Survey Data," Working Papers 200003, University of Hawaii at Manoa, Department of Economics.
  9. Christiano, Lawrence J. & Trabandt, Mathias & Walentin, Karl, 2007. "Introducing Financial Frictions and Unemployment into a Small Open Economy Model," Working Paper Series 214, Sveriges Riksbank (Central Bank of Sweden), revised 01 Jun 2011.
  10. Stephen K. McNees, 1992. "How large are economic forecast errors?," New England Economic Review, Federal Reserve Bank of Boston, issue Jul, pages 25-42.
  11. Andrew Ang & Geert Bekaert & Min Wei, 2006. "Do macro variables, asset markets, or surveys forecast inflation better?," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2006-15, Board of Governors of the Federal Reserve System (U.S.).
  12. David H. Romer & Christina D. Romer, 2000. "Federal Reserve Information and the Behavior of Interest Rates," American Economic Review, American Economic Association, vol. 90(3), pages 429-457, June.
  13. Gamber, Edward N. & Smith, Julie K., 2009. "Are the Fed's inflation forecasts still superior to the private sector's?," Journal of Macroeconomics, Elsevier, Elsevier, vol. 31(2), pages 240-251, June.
  14. Bernanke, Ben S. & Boivin, Jean, 2003. "Monetary policy in a data-rich environment," Journal of Monetary Economics, Elsevier, Elsevier, vol. 50(3), pages 525-546, April.
  15. Dean Croushore & Tom Stark, 2003. "A Real-Time Data Set for Macroeconomists: Does the Data Vintage Matter?," The Review of Economics and Statistics, MIT Press, vol. 85(3), pages 605-617, August.
  16. Rochelle M. Edge & Michael T. Kiley & Jean-Philippe Laforte, 2010. "A comparison of forecast performance between Federal Reserve staff forecasts, simple reduced-form models, and a DSGE model," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 25(4), pages 720-754.
  17. Ray C. Fair & Robert J. Shiller, 1988. "The Informational Content of Ex Ante Forecasts," Cowles Foundation Discussion Papers 857, Cowles Foundation for Research in Economics, Yale University.
  18. Giannone, Domenico & Lenza, Michele & Reichlin, Lucrezia, 2008. "Explaining the Great Moderation: it is not the shocks," Working Paper Series, European Central Bank 0865, European Central Bank.
  19. 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.
  20. Carlos Capistrán & Allan Timmermann, 2008. "Forecast Combination With Entry and Exit of Experts," CREATES Research Papers 2008-55, School of Economics and Management, University of Aarhus.
  21. Smets, Frank & Wouters, Raf, 2007. "Shocks and frictions in US business cycles: a Bayesian DSGE approach," Working Paper Series, European Central Bank 0722, European Central Bank.
  22. Antonello D'Agostino & Karl Whelan, 2008. "Federal Reserve Information During the Great Moderation," Journal of the European Economic Association, MIT Press, MIT Press, vol. 6(2-3), pages 609-620, 04-05.
  23. Phillips, Peter C.B. & Sun, Yixiao & Jin, Sainan, 2004. "Consistent HAC Estimation and Robust Regression Testing Using Sharp Origin Kernels with No Truncation," University of California at San Diego, Economics Working Paper Series qt6d36x00z, Department of Economics, UC San Diego.
  24. Frank Schorfheide, 2003. "Learning and monetary policy shifts," Working Paper, Federal Reserve Bank of Atlanta 2003-23, Federal Reserve Bank of Atlanta.
  25. William T. Gavin & Rachel J. Mandal, 2002. "Evaluating FOMC forecasts," Working Papers 2001-005, Federal Reserve Bank of St. Louis.
  26. Timothy Cogley & Argia M. Sbordone, 2008. "Trend Inflation, Indexation, and Inflation Persistence in the New Keynesian Phillips Curve," American Economic Review, American Economic Association, vol. 98(5), pages 2101-26, December.
  27. Zarnowitz, Victor, 1992. "Business Cycles," National Bureau of Economic Research Books, University of Chicago Press, number 9780226978901, March.
  28. Croushore Dean, 2010. "An Evaluation of Inflation Forecasts from Surveys Using Real-Time Data," The B.E. Journal of Macroeconomics, De Gruyter, De Gruyter, vol. 10(1), pages 1-32, May.
  29. Victor Zarnowitz & Phillip Braun, 1992. "Twenty-two Years of the NBER-ASA Quarterly Economic Outlook Surveys: Aspects and Comparisons of Forecasting Performance," NBER Working Papers 3965, National Bureau of Economic Research, Inc.
  30. Eric Swanson & Gary Anderson & Andrew Levin, 2006. "Higher-order perturbation solutions to dynamic, discrete-time rational expectations models," Working Paper Series 2006-01, Federal Reserve Bank of San Francisco.
  31. Dean Croushore & Tom Stark, 1999. "A real-time data set for macroeconomists," Working Papers 99-4, Federal Reserve Bank of Philadelphia.
  32. James H. Stock & Mark W. Watson, 2007. "Why Has U.S. Inflation Become Harder to Forecast?," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 39(s1), pages 3-33, 02.
  33. Frank Smets & Raf Wouters, 2002. "An estimated dynamic stochastic general equilibrium model of the euro area," Working Paper Research, National Bank of Belgium 35, National Bank of Belgium.
  34. Joutz, Fred & Stekler, H. O., 2000. "An evaluation of the predictions of the Federal Reserve," International Journal of Forecasting, Elsevier, Elsevier, vol. 16(1), pages 17-38.
  35. 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, American Statistical Association, vol. 25, pages 123-143, April.
  36. Joseph Engelberg & Charles F. Manski & Jared Williams, 2006. "Comparing the Point Predictions and Subjective Probability Distributions of Professional Forecasters," NBER Working Papers 11978, National Bureau of Economic Research, Inc.
  37. Tom Stark, 2010. "Realistic evaluation of real-time forecasts in the Survey of Professional Forecasters," Research Rap Special Report, Federal Reserve Bank of Philadelphia, Federal Reserve Bank of Philadelphia, issue May.
  38. Malin Adolfson & Jesper Linde & Mattias Villani, 2007. "Forecasting Performance of an Open Economy DSGE Model," Econometric Reviews, Taylor & Francis Journals, Taylor & Francis Journals, vol. 26(2-4), pages 289-328.
  39. Harding, Don & Pagan, Adrian, 2006. "Synchronization of cycles," Journal of Econometrics, Elsevier, Elsevier, vol. 132(1), pages 59-79, May.
Full references (including those not matched with items on IDEAS)

Citations

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:ptu:wpaper:w201114. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (DEE-NTDD).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.