How Useful is the Carry-Over Effect for Short-Term Economic Forecasting?

Abstract

The carry-over effect is the advance contribution of the old year to growth in the new year. Among practitioners the informative content of the carry-over effect for short-term forecasting is undisputed and is used routinely in economic forecasting. In this paper, the carry-over effect is analysed 'statistically' and it is shown how it reduces the uncertainty of short-term economic forecasts. This is followed by an empirical analysis of the carry-over effect using simple forecast models as well as Bundesbank and Consensus projections.

Keywords: forecast uncertainty, growth rates, carry-over effect, variance contribution, Chebyshev density

JEL Classification: C53, E37, C16