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The Curse of Irving Fisher (Professional Forecasters' Version)

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Author Info

  • Gregor W. Smith

    () (Queen's University)

  • James Yetman

    () (University of Hong Kong)

Abstract

Dynamic Euler equations restrict multivariate forecasts. Thus a range of links between macroeconomic variables can be studied by seeing whether they hold within the multivariate predictions of professional forecasters. We illustrate this novel way of testing theory by studying the links between forecasts of U.S. nominal interest rates, inflation, and real consumption growth since 1981. By using forecast data for both returns and macroeconomic fundamentals, we use the complete cross-section of forecasts, rather than the median. The Survey of Professional Forecasters yields a three-dimensional panel, across quarters, forecasters, and forecast horizons. This approach yields 14727 observations, much greater than the 107 time series observations. The resulting precision reveals a significant, negative relationship between consumption growth and interest rates.

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File URL: http://qed.econ.queensu.ca/working_papers/papers/qed_wp_1144.pdf
File Function: First version 2007
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Bibliographic Info

Paper provided by Queen's University, Department of Economics in its series Working Papers with number 1144.

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Length: 30 pages
Date of creation: Nov 2007
Date of revision:
Handle: RePEc:qed:wpaper:1144

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Keywords: forecast survey; asset pricing; Fisher effect;

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References

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  1. Motohiro Yogo, 2004. "Estimating the Elasticity of Intertemporal Substitution When Instruments Are Weak," The Review of Economics and Statistics, MIT Press, vol. 86(3), pages 797-810, August.
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  10. Croushore Dean, 2010. "An Evaluation of Inflation Forecasts from Surveys Using Real-Time Data," The B.E. Journal of Macroeconomics, De Gruyter, vol. 10(1), pages 1-32, May.
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Cited by:
  1. Devereux, Michael B. & Smith, Gregor W. & Yetman, James, 2012. "Consumption and real exchange rates in professional forecasts," Journal of International Economics, Elsevier, vol. 86(1), pages 33-42.

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