Forecast Performance in Times of Terrorism
CFDS Discussion Paper No. 1-2017
41 Pages Posted: 19 Dec 2017
Date Written: December 2017
Governments, central banks, and private companies make extensive use of expert and market-based forecasts in their decision-making processes. These forecasts can be affected by terrorism, which should be considered by decision makers. We focus on terrorism, as a mostly endogenously driven form of political uncertainty, and use new econometric tests to assess the forecasting performance of market and professional inflation and exchange-rate forecasts in Israel. We show that expert forecasts are better than market-based forecasts, particularly during periods of terrorism. However, forecasting performance and abilities of both market-based and expert forecasts are significantly reduced during such periods. Thus, policymakers should be particularly attentive to terrorism when considering inflation and exchange-rate forecasts.
Keywords: inflation, exchange rate, forecast performance, terrorism, market forecast, expert forecast
JEL Classification: C53, E37, F37, F51
Suggested Citation: Suggested Citation