A new framework for analyzing survey forecasts using three-dimensional panel data

Abstract

This paper develops a framework for analyzing forecast errors in a panel data setting. The framework provides the means 1. (1) to test for forecast rationality when forecast errors are simultaneously correlated across individuals, across target years, and across forecast horizons using Generalized Method of Moments estimation, 2. (2) to discriminate between forecast errors which arise from unforecastable macroeconomic shocks and forecasts errors which arise from idiosyncratic errors, 3. (3) to measure monthly aggregate shocks and their volatilities independent of data revisions and prior to the actual being realized, 4. (4) to test for the impact of ‘news’ on volatility. We use the Blue Chip Survey of Professional Forecasts over the period July 1976 through May 1992 to implement the methodology.