Evaluating Macroeconomic Forecasts: A Concise Review of Some Recent Developments

Philip Hans Franses, Michael McAleer and Rianne Legerstee
Additional contact information
Rianne Legerstee: Econometric Institute, Erasmus School of Economics, Erasmus University Rotterdam and Tinbergen Institute The Netherlands

No 2012-14, Documentos de Trabajo del ICAE from Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico

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.

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)
Pages: 28 pages
Date: 2012-06
New Economics Papers: this item is included in nep-cwa, nep-ecm, nep-for, nep-his and nep-mac
Note: The authors wish to thank Les Oxley, Chia-Lin Chang, an Associate Editor and two anonymous referees for detailed and 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.
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://eprints.ucm.es/id/eprint/15603/1/1214.pdf (application/pdf)

Related works:
Journal Article: EVALUATING MACROECONOMIC FORECASTS: A CONCISE REVIEW OF SOME RECENT DEVELOPMENTS (2014)
Working Paper: Evaluating Macroeconomic Forecasts: A Concise Review of Some Recent Developments (2012)
Working Paper: Evaluating Macroeconomic Forecasts:A Concise Review of Some Recent Developments (2012)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ucm:doicae:1214

Ordering information: This working paper can be ordered from
Facultad de Ciencias Económicas y Empresariales. Pabellón prefabricado, 1ª Planta, ala norte. Campus de Somosaguas, 28223 - POZUELO DE ALARCÓN (MADRID)
https://www.ucm.es/f ... -de-trabajo-del-icae

Access Statistics for this paper

More papers in Documentos de Trabajo del ICAE from Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico Contact information at EDIRC.
Bibliographic data for series maintained by Águeda González Abad ().