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Pratiti Chatterjee, Sylwia Nowak

Forecast Errors and Uncertainty Shocks

2017. Vol. 12. No. 2. P. 211–226 [issue contents]

High-quality macroeconomic forecasts are crucial inputs for economic decisions and policy making. Both the accuracy of forecasts and the efficiency with which information is incorporated into forecasts are critically important. At the same time, these forecasts are persistently too optimistic.

To explain this phenomenon, the authors explore common drivers of macroeconomic forecast overoptimism in different countries using the principal component analysis. They find that most of the variability in optimistic next-year forecast errors can be explained by four common factors. The optimism or pessimism with respect to gross domestic product (GDP) targets exhibits a certain degree of consistency across countries. Uncertainty about U.S. macrofinancial developments and global demand are the key drivers of forecast overoptimism. These common factors matter most for advanced economies and G20 members. Moreover, the explicit link between uncertainty about U.S. macroeconomic developments and next-year forecast errors has implications for the trajectory of macroeconomic variables. A vector autoregression (VAR) analysis shows that upward surges in uncertainty about U.S. business conditions lead to a decline in the next-year GDP growth rate in advanced economies and emerging countries. This result supports the link between uncertainty and overoptimism in next-year forecast errors. It also implies that incorporating the common structure governing forecast errors across countries can help improve subsequent forecasts and future policy making.

Citation: Chatterjee P., Nowak S. (2017) Forecast Errors and Uncertainty Shocks. International OrganisationsResearch Journal, vol. 12, no 2, pp. 211–226. (in Russian). DOI: 10.17323/1996-7845-2017-02-211
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