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Evaluating Macroeconomic Forecasts: A Concise Review of Some Recent Developments

Philip Hans Franses, Michael McAleer and Rianne Legerstee

Working Papers in Economics from University of Canterbury, Department of Economics and Finance

Abstract: Macroeconomic forecasts are frequently produced, widely published, inten¬sively 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 macro¬economic 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 econo¬metric 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 intu¬ition. It is shown that alternative tools are needed to compare and evaluate the fore-casts 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.

Keywords: Macroeconomic forecasts; econometric models; human intuition; biased forecasts; forecast performance; forecast evaluation; forecast comparison (search for similar items in EconPapers)
JEL-codes: C22 C51 C52 C53 E27 E37 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-for, nep-his, nep-hpe and nep-mac
Date: 2012-06-08
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http://www.econ.canterbury.ac.nz/RePEc/cbt/econwp/1212.pdf (application/pdf)

Related works:
Journal Article: EVALUATING MACROECONOMIC FORECASTS: A CONCISE REVIEW OF SOME RECENT DEVELOPMENTS (2014) Downloads
Working Paper: Evaluating Macroeconomic Forecasts:A Concise Review of Some Recent Developments (2012) Downloads
Working Paper: Evaluating Macroeconomic Forecasts: A Concise Review of Some Recent Developments (2012) Downloads
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