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Evaluating Macroeconomic Forecasts: A Review of Some Recent Developments

  • Philip Hans Franses

    (Erasmus School of Economics, Erasmus University Rotterdam)

  • Michael McAleer

    (Erasmus School of Economics, Erasmus University Rotterdam and Tinbergen Institute)

  • Rianne Legerstee

    (Erasmus School of Economics, Erasmus University Rotterdam and Tinbergen Institute)

Macroeconomic forecasts are frequently produced, published, discussed and used. The formal evaluation of such forecasts has a long research history. Recently, a new angle to the evaluation of forecasts has been addressed, and in this review we analyse some recent developments from that perspective. The literature on forecast evaluation predominantly assumes that macroeconomic forecasts are generated from econometric models. In practice, however, most macroeconomic forecasts, such as those from the IMF, World Bank, OECD, Federal Reserve Board, Federal Open Market Committee (FOMC) and the ECB, are based on econometric model forecasts as well as on human intuition. This seemingly inevitable combination renders most of these forecasts biased and, as such, their evaluation becomes non-standard. In this review, we consider the evaluation of two forecasts in which: (i) the two forecasts are generated from two distinct econometric models; (ii) one forecast is generated from an econometric model and the other is obtained as a combination of a model, the other forecast, and intuition; and (iii) the two forecasts are generated from two distinct combinations of different models and intuition. It is shown that alternative tools are needed to compare and evaluate the forecasts in each of these three situations. These alternative techniques are illustrated by comparing the forecasts from the Federal Reserve Board and the FOMC on inflation, unemployment and real GDP growth.

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File URL: http://www.cirje.e.u-tokyo.ac.jp/research/dp/2010/2010cf729.pdf
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Paper provided by CIRJE, Faculty of Economics, University of Tokyo in its series CIRJE F-Series with number CIRJE-F-729.

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Length: 28pages
Date of creation: Mar 2010
Date of revision:
Handle: RePEc:tky:fseres:2010cf729
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  1. Timmermann, Allan, 2006. "Forecast Combinations," Handbook of Economic Forecasting, Elsevier.
  2. Todd E. Clark & Michael W. McCracken, 1999. "Tests of equal forecast accuracy and encompassing for nested models," Research Working Paper 99-11, Federal Reserve Bank of Kansas City.
  3. Christina D. Romer & David H. Romer, 2008. "The FOMC versus the Staff: Where Can Monetary Policymakers Add Value?," American Economic Review, American Economic Association, vol. 98(2), pages 230-35, May.
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  6. Franses, Ph.H.B.F. & McAleer, M.J. & Legerstee, R., 2008. "Expert opinion versus expertise in forecasting," Econometric Institute Research Papers EI 2008-30, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
  7. Elliott, Graham & Timmermann, Allan G, 2007. "Economic Forecasting," CEPR Discussion Papers 6158, C.E.P.R. Discussion Papers.
  8. Diebold, Francis X & Mariano, Roberto S, 2002. "Comparing Predictive Accuracy," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 134-44, January.
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  10. Fiebig, Denzil G. & McAleer, Michael & Bartels, Robert, 1992. "Properties of ordinary least squares estimators in regression models with nonspherical disturbances," Journal of Econometrics, Elsevier, vol. 54(1-3), pages 321-334.
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