Measuring Forecast Uncertainty by Disagreement: The Missing Link

Kajal Lahiri () and Xuguang Sheng

No Ifo Working Paper No. 60, Ifo Working Paper Series from Ifo Institute for Economic Research at the University of Munich

Abstract: Using a standard decomposition of forecasts errors into common and idiosyncratic shocks, we show that aggregate forecast uncertainty can be expressed as the disagreement among the forecasters plus the perceived variability of future aggregate shocks. Thus, the reliability of disagreement as a proxy for uncertainty will be determined by the stability of the forecasting environment, and the length of the forecast horizon. Using density forecasts from the Survey of Professional Forecasters, we find direct evidence in support of our hypothesis. Our results support the use of GARCH-type models, rather than the ex post squared error in consensus forecasts, to estimate the ex ante variability of aggregate shocks as a component of aggregate uncertainty.

Keywords: Aggregate shocks; public information; forecast disagreement; forecasthorizon; forecast uncertainty; panel data; private information (search for similar items in EconPapers)
JEL-codes: E17 E37 (search for similar items in EconPapers)
Date: 2008

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