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The Curse of Irving Fisher (Professional Forecasters’ Version)

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  • Smith, Gregor W.
  • Yetman, James

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.

Suggested Citation

  • Smith, Gregor W. & Yetman, James, 2007. "The Curse of Irving Fisher (Professional Forecasters’ Version)," Queen's Economics Department Working Papers 273620, Queen's University - Department of Economics.
    • Handle: RePEc:ags:quedwp:273620
    DOI: 10.22004/ag.econ.273620
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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.
    2. Gregor W. Smith, 2008. "Us Inflation Dynamics 1981-2007: 13,193 Quarterly Observations," Working Paper 1155, Economics Department, Queen's University.

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    Keywords

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    JEL classification:

    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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