Has Models' Forecasting Performance for US Output Growth and Inflation Changed over Time, and When?

Abstract:     
We evaluate various models' relative performance in forecasting future US output growth and inflation on a monthly basis. Our approach takes into account the possibility that the models' relative performance can be varying over time. We show that the models' relative performance has, in fact, changed dramatically over time, both for revised and real-time data, and investigate possible factors that might explain such changes. In addition, this paper establishes two empirical stylized facts. Namely, most predictors for output growth lost their predictive ability in the mid-1970s, and became essentially useless in the last two decades. When forecasting inflation, instead, fewer predictors are significant (among which, notably, capacity utilization and unemployment), and their predictive ability significantly worsened around the time of the Great Moderation.

Keywords: Output Forecasts, Inflation Forecasts, Model Selection, Structural Change, Forecast Evaluation, Real-time Data

JEL Classifications: C22, C52, C53

Accepted Paper Series