Rationality and the Role of Judgement in Macroeconomic Forecasting

Abstract

This paper examines the effects of judgemental adjustments on the rationality of macroeconomic forecasts. Published forecasts based on large-scale models are rarely purely model-based, but often include extensive adjustments. Forecasters' adjustments tend to improve forecast accuracy, but there is no evidence of their impact on the rationality of forecasts. Using series of revisions to forecasts we find little evidence that published forecasts are excessively smooth in the Nordhaus (1987) sense, but intercept corrections do appear to reduce the variation over time in purely model-based forecasts and to alter the underlying output/inflation trade-off implicit in the model.