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Forecast errors and financial developments

  • Palle S. Andersen
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    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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    Paper provided by Bank for International Settlements in its series BIS Working Papers with number 51.

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    Length: 61 pages
    Date of creation: Nov 1997
    Date of revision:
    Handle: RePEc:bis:biswps:51
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    1. Hamilton, James D & Gang, Lin, 1996. "Stock Market Volatility and the Business Cycle," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(5), pages 573-93, Sept.-Oct.
    2. Stephen K. McNees, 1992. "How large are economic forecast errors?," New England Economic Review, Federal Reserve Bank of Boston, issue Jul, pages 25-42.
    3. Stephen K. McNees, 1987. "Consensus forecasts: tyranny of the majority?," New England Economic Review, Federal Reserve Bank of Boston, issue Nov, pages 15-21.
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    5. Tzavalis, E. & Wickens, M.R., 1995. "Forecasting Inflation from the Term Structure," Discussion Papers 9519, Exeter University, Department of Economics.
    6. Ellis W. Tallman & Naveen Chandra, 1997. "Financial Aggregates as Conditioning Information for Australian Output and Inflation," RBA Research Discussion Papers rdp9704, Reserve Bank of Australia.
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    8. Charles Steindel, 1992. "Changes in the U.S. cycle: shifts in capital spending and balance sheet changes," Research Paper 9224, Federal Reserve Bank of New York.
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    10. Josef Baumgartner & Ramana Ramaswamy, 1996. "Inflation Targeting in the United Kingdom; Information Content of Financial and Monetary Variables," IMF Working Papers 96/44, International Monetary Fund.
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    12. Nathan S. Balke & Mark A. Wynne, 1995. "Are deep recessions followed by strong recoveries? Results for the G-7 countries," Working Papers 9509, Federal Reserve Bank of Dallas.
    13. Horioka, Charles Yuji, 1996. "Capital Gains in Japan: Their Magnitude and Impact on Consumption," Economic Journal, Royal Economic Society, vol. 106(436), pages 560-77, May.
    14. Stephen G. Cecchetti, 1995. "Inflation Indicators and Inflation Policy," NBER Chapters, in: NBER Macroeconomics Annual 1995, Volume 10, pages 189-236 National Bureau of Economic Research, Inc.
    15. 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.
    16. Granger, Clive W J, 1996. "Can We Improve the Perceived Quality of Economic Forecasts?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(5), pages 455-73, Sept.-Oct.
    17. Stephen K. McNees, 1992. "The 1990-91 recession in historical perspective," New England Economic Review, Federal Reserve Bank of Boston, issue Jan, pages 3-22.
    18. Luis Catão & Ramana Ramaswamy, 1995. "Recession and Recovery in the United Kingdom in the 1990'+L927s; A Vector Autoregression Approach," IMF Working Papers 95/40, International Monetary Fund.
    19. Stephen K. McNees, 1995. "Assessment of the "official" economic forecasts," New England Economic Review, Federal Reserve Bank of Boston, issue Jul, pages 13-23.
    20. Stephen K. McNees, 1987. "Forecasting cyclical turning points: the record in the past three recessions," New England Economic Review, Federal Reserve Bank of Boston, issue Mar, pages 31-40.
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