Predictability of Output Growth and Inflation: A Multi-Horizon Survey Approach, Summary of Paper by Andrew Patton, Allan Timmermann
7 Pages Posted: 2 Jan 2016 Last revised: 13 Jan 2017
Date Written: November 16, 2015
Abstract
Patton and Timmermann (2011) develop an unobserved-components approach to study surveys of forecasts containing multiple forecast horizons. Under the assumption that forecasters optimally update their beliefs about past, current, and future state variables as new information arrives, their model extracts information on the degree of predictability of the state variable and the importance of measurement errors in the observables. The empirical results suggest that inflation exhibits greater persistence, and thus is predictable at longer horizons, than GDP growth and the persistent component of both variables is well approximated by a low-order autoregressive specification.
We choose this paper (henceforth, “the paper”) to summarize since it provides key insights into how the information that can be gleaned from the revised forecasts of forecasters can be a valuable source of improving forecasts and to understand the strength of agents beliefs.
Keywords: Predictability, Output Growth, Inflation, Measurement, Error
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