Private Sector Forecasts Research Articles

Forecasting GDP with the Leading Indicators: A VAR Approach

The Conference Board’s Leading Economic Indicators Index suffers from construction flaws, which reduce its predictive power as well as one’s ability to interpret its signals. This paper develops a vector autoregression model to address these problems. The model’s out-of-sample GDP forecasts, using revised data, are found to outperform other private-sector forecasters on average over the period considered.

Cross-country evidence on the quality of private sector fiscal forecasts

This paper provides evidence of the quality of private sector forecasts of the budget balance between 1993 and 2009 for a sample of 29 countries, grouped into advanced and emerging countries. We find large differences across the two groups: forecasts for advanced economies are much more accurate than for emerging economies and much less subject to a bias towards optimism (i.e. they are less likely to forecast a bigger budget balance than the realization). Forecasts for both groups, however, exhibit a tendency toward forecast smoothing: forecasts are revised slowly so that revisions to forecasts can be systematically predicted based on past revisions. This tendency proves costly around turning points in the economy when the budget balance moves sharply but the corresponding forecasts only adjust very slowly to the reality of the situation.

Central banks’ inflation forecasts under asymmetric loss: Evidence from four Latin-American countries

We study the rationality of the inflation forecasts of the central banks of Argentina, Brazil, Chile, and Mexico. We reject rationality under a symmetric (Chile is an exception) but not under an asymmetric loss function. An overprediction implies a larger loss than an underprediction. We also analyze alternative rationality tests, growth forecasts, and private-sector forecasts.

Central Bank Transparency and the Consensus Forecast: What Does the Economist Poll of Forecasters Tell Us?

We are interested, in this paper, in studying the effects that central banks exert on private sector forecasts by means of their transparency and communication measures. We analyze the impact of central bank transparency on the accuracy of the consensus forecasts (usually calculated as the mean or the median of the forecasts from a panel of individual forecasters) for a series of macroeconomic variables: inflation, Real output growth and the current account as a share of GDP for 7 advanced economies. Interestingly, while it is found of significance of central bank transparency and communication measures on forecasts themselves, there appear some limits of the same measures when we study their impact on forecast errors. Our findings, indeed, suggest that deviations of the economic forecast data from the realized ones (RGDP and the current account as a share of GDP) are a bit affected by the central bank transparency measures considered in the paper. Inflation forecast errors, especially, are not affected at all by those measures. A possible explanation (among others) could be attributed to the inefficiency of the mean forecasts. Inefficiency of the consensus forecasts is not a new issue from a theoretical point of view, but its empirical relevance is for the first time (to our knowledge) questioned on data extracted from the Economist poll of forecasters. More particularly, our paper extracts practical implications over the effectiveness of transparent announcements in forecast formation process. We rely on two noisy information models, though having different mechanisms (Kim et al, 2001; Morris and Shin, 2002) both of which are consistent with overweighting issue to explain the inefficiency of the consensus forecast.

The distribution of inflation forecast errors

This paper investigates the cross-sectional distribution of inflation forecasts errors over the period 1984–2007. Our working hypothesis is that the Fed's movement toward greater transparency starting in the mid-1990s likely affected both the distribution of forecast errors and the location of the Fed's staff forecasts within that distribution. This paper builds on earlier work which compared Fed forecasts to the mean or median of private sector forecasts by examining the entire distribution of forecasts. By examining the entire distribution we are able to compare the forecasting record of particular forecasters against a record comprised of randomly assigned forecasts from the Survey of Professional Forecasters. Since the Fed's move toward greater transparency beginning in 1994, its forecasting record is no longer significantly better than the forecasting record comprised of randomly assigned forecasts.

Central banks’ interest rate projections and forecast coordination

We apply a simple test to study the effect of the publication of central banks’ interest-rate projections on the coordination of private-sector interest-rate forecasts. Our results indicate that the publication of interest-rate projections does not lead private-sector forecasters to coordinate their forecasts. In fact, private-sector forecasters rather seem to anti-coordinate, that is, they scatter their forecasts around a consensus forecast or around a central bank's interest-rate projections.

Inflation forecasts and core inflation measures: Where is the information on future inflation?

• We compare the inflation forecast errors from the Greenbook, SPF and core inflation measures to a random walk model. • Forecasts from a random walk model are poor. • Greenbook forecasts no longer consistently maintain their information advantage. • The weighted median and trimmed mean do provide valuable information about the tendency of prices in the medium run. • The weighted median and trimmed mean provide information similar to the information in the Greenbook forecasts. This paper uses the forecast from a random walk model of inflation as a benchmark to test and compare the forecast performance of several alternatives of future inflation, including the Greenbook forecast by the Fed staff, the Survey of Professional Forecasters median forecast, CPI inflation minus food and energy, CPI weighted median inflation, and CPI trimmed mean inflation. The Greenbook forecast was found in previous literature to be a better forecast than other private sector forecasts. Our results indicate that both the Greenbook and the Survey of Professional Forecasters median forecasts of inflation and core inflation measures may contain better information than forecasts from a random walk model. The Greenbook's superiority appears to have declined against other forecasts and core inflation measures.

On the accuracy of private forecasts of inflation and growth in Brazil

This study evaluates the accuracy of the private-sector forecasts of inflation and growth in industrial production collected by the Brazilian Central Bank (BCB). In addition to examining directional accuracy, we utilize as benchmarks both naive and univariate autoregressive moving-average (ARMA) forecast and test rationality under flexible loss to allow for the possibility of asymmetric loss. Our analysis yields three important findings: First, the private forecasts are directionally accurate. Second, they are superior to the naive forecasts and are either superior or as accurate as the ARMA forecasts. Third, the private forecasts are generally rational under either asymmetric or symmetric loss. Such findings point to the success of the BCB in anchoring private expectations. Given their importance as monetary policy inputs, we conclude that private inflation and growth forecasts are of value to the BCB for policymaking.

Do private sector forecasters chase after IMF or OECD forecasts?

In this paper we use data from the Consensus Economics forecast poll to explore the strategic behavior of private sector forecasters with respect to forecasts published by the IMF and the OECD. We focus on four key macroeconomic variables for the G7 countries to analyze whether private sector forecasters herd towards the projections published by these international organizations. Our empirical results show that an anti-herding strategy of private sector forecasters is prevalent for the G7 countries, i.e., they intentionally place their forecasts away from the forecasts published by the IMF and the OECD. In addition, we find that the strategic behavior of private sector forecasters lasts roughly 3months.

Currency crises, uncertain fundamentals and private-sector forecasts

The cross-sectional dispersion of private-sector forecasts has been used in recent research on currency crises as a measure of uncertainty over expected fundamentals. We argue that the cross-sectional dispersion of private-sector forecasts need not only reflect uncertainty over expected fundamentals but may also arise due to a deliberate scattering of forecasts. Using data on foreign exchange (FX) reserve forecasts for 11 South-American and Eastern-European countries, we report evidence of such a forecast scattering that seems more pronounced during the economic crisis of 2008/09.

Do Private Sector Forecasters Desire to Deviate From the German Council of Economic Experts?

Summary In this paper, we contrast more than 6,000 private sector forecasts to projections of the German Council of Economic Experts (Sachverständigenrat). Although the forecasts are submitted simultaneously, we find that the Council’s real economy forecasts, i. e. their growth, unemployment and fiscal forecasts have a higher forecast accuracy compared to the private sector forecasts. We also document that private sector forecasters deliberately place their real economy forecasts away from the Council’s projection. This strategic forecasting behavior explains why the private sector performs worse than the Council. Splitting the private sector in different groups reveals that the forecasts of banks compared to research institutes deviate more from the Council’s forecast.

Monetary policy and oil price expectations

This article provides robust estimates that the Bank of Canada, Bank of England, Federal Reserve Bank and the European Central Bank (ECB) respond to a 1% increase in oil price expectations with an increase in the interest rate of on average about 11 basis points. To correctly assess the information set of a central bank we use private sector forecasts and disentangle oil price expectations from inflation expectations. We also find asymmetries in the central bank's behaviour and report that those central banks do not respond to the realized oil price.

The Role of Central Bank Transparency for Guiding Private Sector Forecasts*

Abstract Central banks have become remarkably more transparent over the last few decades. In this paper, we study the effects of this evolution, focusing on whether enhanced central bank transparency lowers dispersion among professional forecasters of key economic variables. We use a large set of proxies for central‐bank transparency in 12 advanced economies. We find evidence for a sizeable effect (e.g., by announcing a quantified inflation objective, or by publishing inflation and output forecasts). However, there are decreasing marginal effects to increases in transparency, and the disagreement among the expectations of the general public is not affected. This suggests that there are possible limits to transparency.

Forecasting GDP Growth in Times of Crisis: Private Sector Forecasts Versus Statistical Models

This paper examines the accuracy of short run forecasts of Dutch GDP growth by several linear statistical models and private sector analysts. We focus on the financial crisis of 2008-2009 and the dot-com recession of 2001-2002. The dynamic factor model turns out to be the best model. Its forecast accuracy during the crisis deteriorates much less than that of the other linear models and hardly at all when backcasting and nowcasting. Moreover, the dynamic factor model beats the private sector forecasters at nowcasting. This finding suggests that adding judgement to a mechanical model may not improve short-term forecasting performance.

Forecast errors before and during the Great Moderation

This paper investigates the change in private sector and Federal Reserve forecasts before and during the Great Moderation. We view the Great Moderation as a natural experiment. Using forecasts produced by the Survey of Professional Forecasters and the Federal Reserve (Greenbook forecasts) we investigate three questions: (1) How large was the decline in forecast errors? (2) Did forecast accuracy improve relative to the decline in volatility of growth and inflation? (3) Did forecasters respond to the Great Moderation? We find that the absolute median error as well as the cross-sectional volatility of forecast errors decreased significantly. Forecasters appeared to have narrowed the dispersion of their forecasts in response to the Great Moderation. Forecast accuracy did not improve relative to the reduction in the volatility of the economy.

Testing the transparency benefits of inflation targeting: Evidence from private sector forecasts

Using inflation forecast data for 11 IT adoption countries, IT adoption is found to promote convergence in forecast errors, suggesting that it enhances transparency. This result, which is subjected to several robustness checks and found to be robust, supports Morris and Shin's (2002) contention that better public information is most beneficial for forecasters with bad private information. However, it does not support their hypothesis that better public information could make private forecasts less accurate.

Inflation Targeting and Private Sector Forecasts

Inflation Targeting and Private Sector Forecasts

The Superiority of Greenbook Forecasts and the Role of Recessions

In this paper, we investigate the role of recessions on the relative forecasting performance of the Fed and the private sector. Romer and Romer (2000) showed that the Fed's forecasts of inflation and output were superior to that of the private sector in the pre-1991 period. D'Agostino and Whelan (2008) found that the information superiority of the Fed deteriorated after 1991. Our results show that the information superiority of the Fed in forecasting real activity did arise from its forecasting dominance during recessions. If recessions are excluded from the pre-1992 period, the informational advantage of the Fed disappears, and in some cases, private sector forecasts perform better. We do not find any systematic effect of recessions on inflation forecasts.

The Role of Central Bank Transparency for Guiding Private Sector Forecasts

There is a broad consensus in the literature that costs of information processing and acquisition may generate costly disagreements in expectations among economic agents, and that central banks may play a central role in reducing such dispersion in expectations. This paper analyses empirically whether enhanced central bank transparency lowers dispersion among professional forecasters of key economic variables, using a large set of proxies for central bank transparency in 12 advanced economies. It finds evidence for a significant and sizeable effect of central bank transparency on forecast dispersion, be it by means of announcing a quantified inflation objective, other forms of communication, or by publishing central banks’ inflation and output forecasts. However, there also appear to be limits to central bank transparency, with decreasing marginal returns to enhancing (economic) transparency, and given our findings that disagreement among inflation expectations in the general public is not affected by the various central bank transparency measures analyzed in this paper. JEL Classification: E37, E52, C53

Are the Fed’s inflation forecasts still superior to the private sector’s?

We examine the relative improvement in forecasting accuracy of the Federal Reserve (Greenbook forecasts) and private-sector forecasts (the Survey of Professional Forecasters and Blue Chip Economic Indicators)for inflation. Previous research by Romer and Romer [Romer, Christina, David, Romer, 2000. Federal reserve information and the behavior of interest rates. American Economic Review 90, 429–457], and Sims [Sims, Christopher, 2002. The role of models and probabilities in the monetary policy process. Brookings Papers on Economic Activity 2, 1–62] shows that the Fed is more accurate than the private sector at forecasting inflation. In a separate line of research, Atkeson and Ohanian [Andrew, Atkeson, Ohanian, Lee E., 2001. Are Phillips curves useful for forecasting inflation? Federal Reserve Bank of Minneapolis Quarterly Review 25, 2–11] and Stock and Watson [Stock, James, Watson, Mark, 2007. Why has U.S. inflation become harder to forecast? Journal of Money, Credit and Banking 39] document changes in the forecastability of inflation since the Great Moderation. These works suggest that the reduced inflation variability associated with the Great Moderation was mostly due to a decline in the variability of the predictable component inflation. We hypothesize that the decline in the variability of the predictable component of inflation has evened the playing field between the Fed and the private sector and therefore led to a narrowing, if not disappearance, of the Fed’s relative forecasting advantage. We find that the Fed’s forecast errors remain significantly smaller than the private sector’s but the gap has narrowed considerable since the mid-1980s, especially after 1994.