EVALUATING INFLATION FORECASTS

Dean Croushore

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Forecasting Techniques and Applications Monetary Policy and Economic Impact Financial Markets and Investment Strategies

Abstract

In the early 1980s, economists tested inflation forecasts and found that the forecasts were very bad.Either the surveys didn't capture forecasters' expectations or forecasters didn't have rational expectations.However, the sample period being examined consisted mostly of data from the volatile 1970s, when forecasting was extremely difficult.The question is: if we run the same types of tests that were performed 15 years ago on an updated sample, will we find the same problems with the forecasts?This paper finds that much of the empirical work from 15 years ago does not stand the test of time.The forecast errors from the surveys aren't nearly as bad today as they were in the 1970s.However, there remain some problems in the forecasts.It appears to be possible to improve inflation forecasts over some sample periods using bias regressions, and the forecasts don't pass all tests for optimality.

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References

1977Time Series Analysis: Forecasting and Control 1980Macroeconomics and Reality 1980Forward Exchange Rates as Optimal Predictors of Future Spot Rates: An Econometric Analysis 1986Forecasting With Bayesian Vector Autoregressions—Five Years of Experience 1967Applied Economic Forecasting 2001A real-time data set for macroeconomists 19968 Forecast evaluation and combination 1993Measuring Core Inflation

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