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Systematic errors in growth expectations over the business cycle

Jonas Dovern and Nils Jannsen

No 1989, Kiel Working Papers from Kiel Institute for the World Economy (IfW)

Abstract: Using real-time data, we analyze how the systematic expectation errors of professional forecasters in 19 advanced economies depend on the state of the business cycle. Our results indicate that the general result that forecasters systematically overestimate output growth (across all countries) masks considerable differences across different business-cycle states. We show that forecasts for recessions are subject to a large negative systematic forecast error (forecasters overestimate growth), while forecasts for recoveries are subject to a positive systematic forecast error. Forecasts made for expansions have, if anything, a small systematic forecast error for large forecast horizons. When we link information about the business-cycle state in the target year with quarterly information about its state in the forecasting period, we find that forecasters realize business-cycle turning points somewhat late. Using cross-country evidence, we demonstrate that the positive relationship between a change in trend growth rates and forecast bias, as suggested in the literature, breaks down when only focusing on forecasts made for expansions.

Keywords: macroeconomic expectations; forecasting; forecast bias; survey data (search for similar items in EconPapers)
JEL-codes: C5 E2 E3 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-for and nep-mac
Date: 2015
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