Oil Price Assumptions in Macroeconomic Forecasts: Should We Follow Futures Market Expectations?

20 Pages Posted: 13 Aug 2004

See all articles by Carlos Coimbra

Carlos Coimbra

Bank of Portugal - Economic Research Department

Paulo Soares Esteves

Bank of Portugal - Economic Research Department

Abstract

In macroeconomic forecasting, in spite of its important role in price and activity developments, oil prices are usually taken as an exogenous variable, for which assumptions have to be made. This paper evaluates the forecasting performance of futures market prices against the other popular technical procedure, the carry-over assumption. The results suggest that there is almost no difference between opting for futures market prices or using the carry-over assumption for short-term forecasting horizons (up to 12 months), while, for longer-term horizons, they favour the use of futures market prices. However, as futures market prices reflect market expectations for world economic activity, futures oil prices should be adjusted whenever market expectations for world economic growth are different to the values underlying the macroeconomic scenarios, in order to fully ensure the internal consistency of those scenarios.

Suggested Citation

Coimbra, Carlos and Soares Esteves, Paulo, Oil Price Assumptions in Macroeconomic Forecasts: Should We Follow Futures Market Expectations?. OPEC Review, Vol. 28, No. 2, pp. 87-106, June 2004, Available at SSRN: https://ssrn.com/abstract=565122

Carlos Coimbra (Contact Author)

Bank of Portugal - Economic Research Department

R. do Ouro, 27
Lisboa, 1100-150
Portugal

Paulo Soares Esteves

Bank of Portugal - Economic Research Department ( email )

R. do Ouro, 27
Lisboa, 1100-150
Portugal

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