Measuring Forecast Uncertainty by Disagreement: The Missing Link
Journal of Applied Econometrics, Forthcoming
45 Pages Posted: 2 Nov 2008 Last revised: 12 Nov 2008
Date Written: November 1, 2008
Using a standard decomposition of forecasts errors into common and idiosyncratic shocks, we show that aggregate forecast uncertainty can be expressed as the disagreement among the forecasters plus the perceived variability of future aggregate shocks. Thus, the reliability of disagreement as a proxy for uncertainty will be determined by the stability of the forecasting environment, and the length of the forecast horizon. Using density forecasts from the Survey of Professional Forecasters, we find direct evidence in support of our hypothesis. Our results support the use of GARCH-type models, rather than the ex post squared errors in consensus forecasts, to estimate the ex ante variability of aggregate shocks as a component of aggregate uncertainty.
Keywords: Unanticipated aggregate shocks, Forecast disagreement, Forecast horizon, Forecast uncertainty, Density forecast, Panel data
JEL Classification: E17, E37
Suggested Citation: Suggested Citation