How Accurate are Government Forecast of Economic Fundamentals?

Chia-Lin Chang (), Philip Hans Franses and Michael McAleer

No EI 2009-09, Econometric Institute Research Papers from Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute

Abstract: A government’s ability to forecast key economic fundamentals accurately can affect business confidence, consumer sentiment, and foreign direct investment, among others. A government forecast based on an econometric model is replicable, whereas one that is not fully based on an econometric model is non-replicable. Governments typically provide non-replicable forecasts (or, expert forecasts) of economic fundamentals, such as the inflation rate and real GDP growth rate. In this paper, we develop a methodology to evaluate non-replicable forecasts. We argue that in order to do so, one needs to retrieve from the non-replicable forecast its replicable component, and that it is the difference in accuracy between these two that matters. An empirical example to forecast economic fundamentals for Taiwan shows the relevance of the proposed methodological approach. Our main finding is that it is the undocumented knowledge of the Taiwanese government that reduces forecast errors substantially.

Keywords: generated regressors; government forecasts; initial forecasts; revised forecasts; non- replicable government forecasts; replicable government forecasts (search for similar items in EconPapers)
JEL-codes: C22 C53 E27 (search for similar items in EconPapers)
Date: 2009-07-23
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Citations: View citations in EconPapers (2)

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