The Unassuming Economist

Barry Ritholtz lists economic predictions about 2016 that didn’t come true. Read the list here.

This paper looks at the effects of a China slowdown on Emerging Market Economies (Indonesia, Malaysia, and Thailand) and Frontier Developing Economies (Cambodia, Lao P.D.R., and Vietnam) in ASEAN. The main finding is that the impact of China growth shocks on ASEAN has risen since the global financial crisis. A one percent decline in China’s growth implies a 0.3 percent reduction in growth for ASEAN EMEs and 0.2 for FDEs. An important component of inflation is also shared between ASEAN and China. These magnitudes are double what they were two decades ago due to stronger trade and financial linkages. Finally, a slowdown in China, while having real effects, also has a financial impact via slower credit growth and lower equity prices. This is in line with the existence of both portfolio balance and signaling channels, in which ASEAN market participants absorb news on China economic activity as an indicator over domestic growth prospects.

For details, see the new IMF Working Paper.

Macroeconomic forecasts are persistently too optimistic. This paper finds that common factors related to general uncertainty about U.S. macrofinancial prospects and global demand drive this overoptimism. These common factors matter most for advanced economies and G- 20 countries. The results suggest that an increase in uncertainty-driven overoptimism has dampening effects on next-year real GDP growth rates. This implies that incorporating the common structure governing forecast errors across countries can help improve subsequent forecasts.

For details, see the new IMF Working Paper.

The view of a professor who has predicted the last eight elections accurately.

Government fiscal forecasts invoke considerable skepticism: Frankel (2012), for instance, calls them “wishful thinking” and advocates the use of private forecasts as a reality check. This recommendation leads to an obvious question: how good are the private sector’s fiscal forecasts? We assess the quality of forecasts of the government budget balance made by the private sector for nine advanced economies between 1993 and 2013, with a special focus on the Great Recession period. Our main findings can be summarized as follows. First, we show that private sector budget balance forecasts typically display bias towards ‘optimism’ but the extent of the bias differs across countries. Second, we find that budget balance forecasts exhibit ‘information rigidity’; that is, revisions to forecasts tend to be smooth. This tendency proves costly around turning points in the economy, which we illustrate here using the forecast errors made during the Great Recession. To conclude, while it is a good idea to complement government fiscal forecasts with those from the private sector, there are steps that the private sector could also take to improve the quality of its own forecasts.

For details, see my paper published in the 21st Federal Forecasters Conference Proceedings.