The Unassuming Economist

New IMF Working paper by Yan Carrière-Swallow and José Marzluf

“We analyze the causes of the apparent bias towards optimism in growth forecasts underpinning the
design of IMF-supported programs, which has been documented in the literature. We find that
financial variables observable to forecasters are strong predictors of growth forecast errors. The
greater the expansion of the credit-to-GDP gap in the years preceding a program, the greater its
over-optimism about growth over the next two years. This result is strongest among forecasts that
were most optimistic, where errors are also increasing in the economy’s degree of liability
dollarization. We find that the inefficient use of financial information applies to growth forecasts more
broadly, including the IMF’s forecasts in the World Economic Outlook and those produced by
professional forecasters compiled by Consensus Economics. We conclude that improved
macrofinancial analysis represents a promising avenue for reducing over-optimism in growth
forecasts.”