Forecasting Output Growth and Inflation: The Role of the Great Recession

108 Pages Posted: 19 Mar 2024

See all articles by Dou Young Lee

Dou Young Lee

Korea Rural Economic Institute

Anastasia Zervou

University of Texas at Austin

Date Written: March 1, 2024

Abstract

This paper examines the local forecasting performance of financial and macroeconomic variables in predicting output growth and inflation relative to autoregressive models from 1959 to 2020, with a focus on changes in the relative forecasting performance triggered by the onset of the Great Recession. Key findings highlight multiple shifts in predictability among commonly used economic models, like the composite leading indicator, and in variables recently attracting attention, like consumer expectations, in forecasting output growth; those models exhibit superior predictive performance during the Great Inflation and Great Recession, but not during the Great Moderation. Financial variables emerge as important in forecasting during the Great Recession. Additionally, labor market variables became relevant in predicting both real economic activity and inflation during the Great Recession period, aligning with the increased attention that the labor market has recently attracted from macroeconomists and policymakers. Lastly, oil prices also exhibit pockets of predictability for forecasting inflation during the Great Recession. Our study contributes to a comprehensive understanding of forecasting dynamics of economic models, and the shifts introduced through the Great Recession experience.

Keywords: Great Recession, Pockets of predictability, Output growth forecasts, Inflation forecasts, Local forecast evaluation

JEL Classification: E37, C22, C52, C53

Suggested Citation

Lee, Dou Young and Zervou, Anastasia, Forecasting Output Growth and Inflation: The Role of the Great Recession (March 1, 2024). Available at SSRN: https://ssrn.com/abstract=4746012 or http://dx.doi.org/10.2139/ssrn.4746012

Dou Young Lee

Korea Rural Economic Institute ( email )

United States

Anastasia Zervou (Contact Author)

University of Texas at Austin ( email )

6906 N Loop 1604 W
San Antonio, TX Texas 78249
United States

HOME PAGE: http://https://liberalarts.utexas.edu/economics/faculty/az7379

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