Optimism Bias in Growth Forecasts—The Role of Planned Policy Adjustments

Kareem Ismail, Roberto Perrelli and Jessie Yang

No 2020/229, IMF Working Papers from International Monetary Fund

Abstract: Are IMF growth forecasts systematically optimistic? And if so, what is the role of planned policy adjustments on this outcome? Are program forecasts as biased as surveillance forecasts? We try to answer these questions using a comprehensive database on IMF forecasts of economic growth in surveillance and program cases during 2003–2017. We find that large planned fiscal and external adjustments are associated with optimistic growth projections, with significant non-linearities for both program and surveillance cases. Specifically, we find evidence that larger planned fiscal adjustment is associated with higher growth optimism in IMF non-concessional, non-precautionary financial arrangements. Our results show the tendency for optimism has persisted in the period after the Global Financial Crisis. Moreover, the strong correlation between the magnitude of the optimism and expected fiscal consolidation provides a cautionary signal for the post-COVID IMF projections as countries embark on a path of fiscal adjustment.

Keywords: Fiscal adjustment; IMF-supported programs; forecast error; optimism bias.; WP; optimism bias; IMF program document; IMF team; policy adjustment; IMF mission (search for similar items in EconPapers)
Pages: 25
Date: 2020-11-08
New Economics Papers: this item is included in nep-mac
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