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Forecast errors and financial developments

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  • Palle S. Andersen

Abstract

As central banks have moved towards a forward-looking implementation of monetary policy, the role of forecasts in the policy process has greatly increased. Against this background, this paper looks at the accuracy of forecasts and, more specifically, addresses the question whether forecasts of growth and inflation can be improved by including information from financial markets. The empirical work presented suggests that average forecast errors are not large enough to seriously undermine the basis for forward-looking monetary policies, except in periods of common shocks and at cyclical turning points. It also appears that unexpected changes in non-financial variables are the primary source of forecast errors. Nonetheless, for several countries, forecasts could also be improved by using the information contents of changes in the yield curve and of movements in exchange rates and other asset prices.

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  • Palle S. Andersen, 1997. "Forecast errors and financial developments," BIS Working Papers 51, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:51
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    References listed on IDEAS

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    Cited by:

    1. Virén, Matti, 1999. "Fiscal Policy, Automatic Stabilisers and Policy Coordination in EMU," Discussion Papers 204, VATT Institute for Economic Research.
    2. Mr. Michael G. Papaioannou & Mr. Joonkyu Park & Jukka Pihlman & Han van der Hoorn, 2013. "Procyclical Behavior of Institutional Investors During the Recent Financial Crisis: Causes, Impacts, and Challenges," IMF Working Papers 2013/193, International Monetary Fund.
    3. Kiander, Jaakko & Virén, Matti, 2000. "Do automatic stabilisers take care of asymmetric shocks in the euro area?," Discussion Papers 234, VATT Institute for Economic Research.
    4. Virén, Matti, 1998. "OECD Forecasts for the G7 Countries in 1969 - 1997," Discussion Papers 187, VATT Institute for Economic Research.
    5. Philip Turner, 2017. "Did Central Banks Cause The Last Financial Crisis? Will They Cause The Next?," National Institute of Economic and Social Research (NIESR) Discussion Papers 484, National Institute of Economic and Social Research.
    6. Mäki, Tuomo & Virén, Matti, 1998. "Fiscal Policy Coordination in OECD Countries," Discussion Papers 160, VATT Institute for Economic Research.

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