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Forecast errors and financial developments

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  • Palle S. Andersen
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    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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    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
    Handle: RePEc:bis:biswps:51
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    Cited by:

    1. Matti Virén, 1998. "OECD Forecasts for the G7 Countries in 1969 - 1997," Discussion Papers 187, Government Institute for Economic Research Finland (VATT).
    2. Michael G Papaioannou & 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 13/193, International Monetary Fund.

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