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Macroeconomic forecasts: an empirical test of rationality and parameter stability

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  • Dipak Ghosh
  • Swarna Dutt

Abstract

The consistency property of a select group of macroeconomic variables, representing both the real and the financial sector of the economy, is re-examined. Consistency is a precondition to rationality in the expectation formation process. The theoretical foundations are similar to those used to study exchange rate expectations. A very reliable and continuous data set, the ASA-NBER survey, is used, which has forecasts over multiple horizons. The Hansen test, which has the dual advantage of being a test of parameter stability over time and also examines the cointegration properties of the actual and forecast series using the modern null of cointegration approach, was applied. This is able to distinguish between unit root and near unit root processes, which is of vital interest in cases of near stationarity. Results show that experts' predictions are inconsistent over all time horizons in the data set.

Suggested Citation

  • Dipak Ghosh & Swarna Dutt, 2000. "Macroeconomic forecasts: an empirical test of rationality and parameter stability," Applied Economics Letters, Taylor & Francis Journals, vol. 7(1), pages 49-52.
    • Handle: RePEc:taf:apeclt:v:7:y:2000:i:1:p:49-52
    DOI: 10.1080/135048500352095
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    References listed on IDEAS

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    1. Peter C. B. Phillips & Mico Loretan, 1991. "Estimating Long-run Economic Equilibria," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(3), pages 407-436.
    2. Zarnowitz, Victor, 1985. "Rational Expectations and Macroeconomic Forecasts," Journal of Business & Economic Statistics, American Statistical Association, vol. 3(4), pages 293-311, October.
    3. Hansen, Bruce E, 2002. "Tests for Parameter Instability in Regressions with I(1) Processes," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 45-59, January.
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    Cited by:

    1. Masahiro Ashiya, 2003. "The directional accuracy of 15-months-ahead forecasts made by the IMF," Applied Economics Letters, Taylor & Francis Journals, vol. 10(6), pages 331-333.

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