Analyzing Macroeconomic Forecastability
Yale ICF Working Paper No. 10
21 Pages Posted: 11 Jun 2009 Last revised: 14 Aug 2010
Date Written: August 12, 2010
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
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