The Unassuming Economist

From a new IMF working paper:

“Financial crises pose unique challenges for forecast accuracy. Using the IMF’s Monitoring of Fund Arrangement (MONA) database, we conduct the most comprehensive evaluation of IMF forecasts to date for countries in times of crises. We examine 29 macroeconomic variables in terms of bias, efficiency, and information content to find that IMF forecasts add substantial informational value as they consistently outperform naive forecast approaches. However, we also document that there is room for improvement: two thirds of the key macroeconomic variables that we examine are forecast inefficiently and 6 variables (growth of nominal GDP, public investment, private investment, the current account, net transfers, and government expenditures) exhibit significant forecast bias. Forecasts for low-income countries are the main drivers of forecast bias and inefficiency, reflecting perhaps larger shocks and lower data quality. When we decompose the forecast errors into their sources, we find that forecast errors for private consumption growth are the key contributor to GDP growth forecast errors. Similarly, forecast errors for non-interest expenditure growth and tax revenue growth are crucial determinants of the forecast errors in the growth of fiscal budgets. Forecast errors for balance of payments growth are significantly influenced by forecast errors in goods import growth. The results highlight which macroeconomic aggregates require further attention in future forecast models for countries in crises.”

In my latest IMF working paper with Zidong An and Joao Jalles, “We describe the evolution of forecasts in the run-up to recessions. The GDP forecasts cover 63 countries for the years 1992 to 2014. The main finding is that, while forecasters are generally aware that recession years will be different from other years, they miss the magnitude of the recession by a wide margin until the year is almost over. Forecasts during non-recession years are revised slowly; in recession years, the pace of revision picks up but not sufficiently to avoid large forecast errors. Our second finding is that forecasts of the private sector and the official sector are virtually identical; thus, both are equally good at missing recessions. Strong booms are also missed, providing suggestive evidence for Nordhaus’ (1987) view that behavioral factors—the reluctance to absorb either good or bad news—play a role in the evolution of forecasts.”

Continue reading here. Here is the link to my 2001 paper.

From a new blog by Mark J. Perry:

“In Warren Buffett’s 2017 annual letter to shareholders, released on Saturday, he discussed the ten-year bet he made in 2007 that an unmanaged, low-cost S&P-500 index fund would out-perform an actively managed group of high-cost hedge funds over a ten-year period from 2008 to 2017, when performance is measured on a basis net of fees, costs, and all expenses. See posts here, here and here for past coverage of Buffett’s famous bet.”

In 2000, I wrote in the Financial Times that “the record of failure to predict recessions is virtually unblemished.” In time for Groundhog Day, my colleague Zidong An, Joao Jalles and I have updated my analysis so that it now covers the years 1992 to 2014 and 63 countries. We find that there is little reason to change my assessment. Like Bill Murray, I am reliving the same moment.

FocusEconomics announces the winners of our 2017 Analyst Forecast Awards. “The Awards recognize the most accurate forecasters for the main macroeconomic indicators across 87 countries and 29 commodity prices in 2016. Details of the awards and the list of winners are available at: www.focus-economics.com/awards.”