The Calibration of Probabilistic Economic Forecasts

31 Pages Posted: 20 Jan 2009

See all articles by John W. Galbraith

John W. Galbraith

McGill University - Department of Economics; Center for Interuniversity Research and Analysis on Organization (CIRANO)

Simon van Norden

HEC Montreal - Department of Finance; CIRANO; University of Montreal - Center for Interuniversity Research in Econometrics

Date Written: November 1, 2008

Abstract

A probabilistic forecast is the estimated probability with which a future event will satisfy a specified criterion. One interesting feature of such forecasts is their calibration, or the match between predicted probabilities and actual outcome probabilities. Calibration has been evaluated in the past by grouping probability forecasts into discrete categories. Here we show that we can do so without discrete groupings; the kernel estimators that we use produce efficiency gains and smooth estimated curves relating predicted and actual probabilities. We use such estimates to evaluate the empirical evidence on calibration error in a number of economic applications including recession and inflation prediction, using both forecasts made and stored in real time and pseudoforecasts made using the data vintage available at the forecast date. We evaluate outcomes using both first-release outcome measures as well as later, thoroughly-revised data. We find strong evidence of incorrect calibration in professional forecasts of recessions and inflation. We also present evidence of asymmetries in the performance of inflation forecasts based on real-time output gaps.

Keywords: calibration, probability forecast, real-time data, inflation, recession

Suggested Citation

Galbraith, John W. and van Norden, Simon, The Calibration of Probabilistic Economic Forecasts (November 1, 2008). CIRANO - Scientific Publications 2008s-28, Available at SSRN: https://ssrn.com/abstract=1326464 or http://dx.doi.org/10.2139/ssrn.1326464

John W. Galbraith (Contact Author)

McGill University - Department of Economics ( email )

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Simon Van Norden

HEC Montreal - Department of Finance ( email )

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