Analyzing Macroeconomic Forecastability

Cowles Foundation Discussion Paper No. 1706

Yale ICF Working Paper No. 10

21 Pages Posted: 11 Jun 2009 Last revised: 14 Aug 2010

See all articles by Ray C. Fair

Ray C. Fair

Yale University - Cowles Foundation; Yale School of Management - International Center for Finance

Date Written: August 12, 2010

Abstract

This paper estimates, using stochastic simulation and a multicountry macroeconometric model, the fraction of the forecast-error variance of output changes and the fraction of the forecast-error variance of inflation that are due to unpredictable asset-price changes. The results suggest that between about 25 and 37 percent of the forecast-error variance of output growth over 8 quarters is due to asset-price changes and between about 33 and 60 percent of the forecast-error variance of inflation over 8 quarters is due to asset-price changes. These estimates provide limits to the accuracy that can be expected from macroeconomic forecasting.

Keywords: Macroeconomic forecasting, Recessions, Booms

JEL Classification: E17

Suggested Citation

Fair, Ray C., Analyzing Macroeconomic Forecastability (August 12, 2010). Yale ICF Working Paper No. 10. Available at SSRN: https://ssrn.com/abstract=1416746 or http://dx.doi.org/10.2139/ssrn.1416746

Ray C. Fair (Contact Author)

Yale University - Cowles Foundation ( email )

Box 208281
New Haven, CT 06520-8281
United States
203-432-3715 (Phone)
203-432-6167 (Fax)

HOME PAGE: http://fairmodel.econ.yale.edu

Yale School of Management - International Center for Finance ( email )

Box 208200
New Haven, CT 06520
United States
203-432-3715 (Phone)
203-432-6167 (Fax)

HOME PAGE: http://fairmodel.econ.yale.edu

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