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Evaluating Macroeconomic Forecasts: A Review of Some Recent Developments

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Franses, Philip Hans and McAleer, Michael and Legerstee, Rianne (2011) Evaluating Macroeconomic Forecasts: A Review of Some Recent Developments. [ Documentos de trabajo del Instituto Complutense de Análisis Económico (ICAE); nº 11, 2011, ] (Unpublished)

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Official URL: http://eprints.ucm.es/12615/


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Abstract

Macroeconomic forecasts are frequently produced, widely published, intensively discussed and comprehensively 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 typically based on econometric model forecasts jointly with 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 and intuition; and (iii) the two forecasts are generated from two distinct (but unknown) 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 (econometric) Staff of the Federal Reserve Board and the FOMC on inflation, unemployment and real GDP growth. It is shown that the FOMC does not forecast significantly better than the Staff, and that the intuition of the FOMC does not add significantly in forecasting the actual values of the economic fundamentals. This would seem to belie the purported expertise of the FOMC.


Item Type:Working Paper or Technical Report
Additional Information:

JEL Classifications: C22, C51, C52, C53, E27, E37.
The authors wish to thank Les Oxley, Chia-Lin Chang, an Associate Editor and two anonymous referees for helpful comments and suggestions. The second author wishes to acknowledge the financial support of the Australian Research Council, National Science Council, Taiwan, and the Japan Society for the Promotion of Science.

Uncontrolled Keywords:Macroeconomic forecasts, Econometric models, Human intuition, Biased forecasts, Forecast performance, Forecast evaluation, Forecast comparison.
Subjects:Social sciences > Economics > Econometrics
Social sciences > Economics > Macroeconomics
Series Name:Documentos de trabajo del Instituto Complutense de Análisis Económico (ICAE)
Volume:2011
Number:11
ID Code:12615
Deposited On:26 Apr 2011 08:48
Last Modified:12 Mar 2014 10:59

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