Roy Batchelor

How useful are the forecasts of intergovernmental agencies? The IMF and OECD versus the consensus

This study compares the accuracy and information content of economic forecasts for G7 countries made in the 1990s by the OECD and IMF. The benchmarks for comparison are the average forecasts of private sector economists published by Consensus Economics. With few exceptions, the private sector forecasts are less biased and more accurate in terms of mean absolute error and root mean square error. Formal tests show these differences are statistically significant for forecasts of real growth and production, less so for forecasts of inflation and unemployment. Overall, there appears little information in the OECD and IMF forecasts that could be used to reduce significantly the error in the private sector forecasts.

Blue Chip Rationality Tests

This paper tests the rationality of forecasts made by individuals who contribute to the Blue Chip consensus forecasting service and tries, by means of a questionnaire on forecasting methods, to establish why some forecasters appear more rational than others. Tests based on consensus forecasts prove unreliable as guides to the number of individuals who produce rational forecasts. Individual forecasts are more likely to be rational if they are based on a mainstream economic theory and incorporate a substantial element of judgment. Copyright 1991 by Ohio State University Press.

Inflation Expectations Revisited

This paper describes the construction and main features of a new monthly time series for the mean and standard deviation of consumer inflation expectations in the United Kingdom in the years 1961-85, based on a number of consumer surveys. This involves generalizing to four- and five-category tendency survey data the method used by J. A. Carlson and M. Parkin (1975) to quantify the results of a three-category tendency survey of inflation expectations. The new series exhibit very different time series properties from the original Carlson-Parkin data. Copyright 1988 by The London School of Economics and Political Science.

Improving macro-economic forecasts: The role of consumer confidence

Abstract The failure of economic forecasters to predict the most recent US recession has renewed interest in the idea of supplementing model-based forecasts with information from other, more qualitative, indicators. This paper tests whether one such variable, the consumer confidence index, could have improved these forecasts; and whether improvements are greatest for forecasts generated by econometric models with little judgmental adjustment. We find that consumer confidence would have been helpful in predicting the 1991 recession. But the result does not generalize to other years, and appears to reflect the special nature of the recession rather than a persistent weakness in forecasting technique.

Rationality testing under asymmetric loss

Abstract This paper shows that if agents have an asymmetric loss function, standard empirical tests for the rationality of their expectations are in general invalid. We further show that under a popular class of asymmetric loss functions, the linex family, a valid test can be carried out by estimating an appropriate ARCH-in-Mean model. The contrast between the standard test and our ARCH-M test is illustrated using the Goldsmith–Nagan forecasts of US Treasury bill yields.

Expectations, output and inflation : The European experience

Abstract This paper introduces new measures of the mean and variance of inflation and growth expectations, based on tendency survey data from four major European economies. The expectations measures are technically ‘irrational’, but more accurate than naive alternatives; expectations errors do not persist for more than a year. Unexpected inflation, and uncertainties about inflation and growth, play the roles assigned them by New Classical macroeconomic theory, respectively raising and lowering real activity. All the expectations, uncertainties and errors appear more closely correlated across countries than experience would justify, suggesting that unpredictable disturbances typically have an internal rather than an international origin.

Aggregate expectations under the stable laws

Abstract Following Lucas, expectations have become central to macroeconomic theory. Empirical implementations generally start from tendency surveys, where respondents indicate the expected direction of change. Carlson and Parkin, and others, turn this into quantitative measures by assuming aggregate expectations followed a normal distribution. These show signs of irrationality. However, the Central Limit Theorem requires only that such a distribution lie in the class of ‘stable probability laws’. Indeed, the Lucas information assumptions, and evidence on individual survey responses, argue against the limiting case of normality. Experiments on European Business Surveys show that substitution of skewed stable distributions can eliminate symptoms of irrationality previously found in survey-based expectations measures.

Event-related GARCH: the impact of stock dividends in Turkey

Cash dividends and rights issues on the Istanbul Stock Exchange are commonly accompanied by large stock dividend payments. This paper tests the proposition that stock dividends have no effect on company value, using a novel GARCH process with event-related intercept terms to capture induced changes in the volatility of stock prices. Returns rise in advance of stock dividend payments, but this effect becomes statistically insignificant when proper allowance is made for heteroscedasticity. Volatility rises after stock dividend payments, and this is attributed to persistence following exceptionally large price movements around the ex-dividend day, rather than to any transitory rise in the unconditional returns variance. The study does document some irrationality in responses to cash dividends, with prices rising/falling after increased/decreased dividend payments, rather than after the much earlier dividend announcements.

All Forecasters Are Equal

From an analysis of the track records of U.S. economic forecasters, Stekler (1987) concluded that “all forecasters are not equal” (p. 158). This article shows that his result is based on an incorrectly defined test statistic. When a more appropriate test is conducted, the figures suggest that accuracy rankings are not significantly different from those that might be expected as a result of sampling error in a population of equally accurate forecasters.

Empirical measures of inflation uncertainty: a cautionary note

A direct, ex ante, measure of inflation uncertainty in the US is compared with a number of proxies used in empirical studies. The direct estimate is the root mean subjective variance of the probability distributions for inflation reported by respondents to the ASA/NBER survey. The proxies include forecast standard deviations from ARIMA, ARCH and structural models of inflation. These proxies are not significantly correlated with the direct measure, nor with one another. Use of the proxies leads to incorrect inferences about the correlation between inflation and inflation uncertainty, and between inflation uncertainty and the real interest rate.