Analyzing Macroeconomic Forecastability
CFDP Update Date
This paper estimates, using stochastic simulation and a multicountry macroeconometric model, the fraction of the forecast-error variance of output changes and the fraction of the forecast-error variance of inflation that are due to unpredictable asset-price changes. The results suggest that between about 25 and 37 percent of the forecast-error variance of output growth over 8 quarters is due to asset-price changes and between about 33 and 60 percent of the forecast-error variance of inflation over 8 quarters is due to asset-price changes. These estimates provide limits to the accuracy that can be expected from macroeconomic forecasting.
Fair, Ray C., "Analyzing Macroeconomic Forecastability" (2009). Cowles Foundation Discussion Papers. 2024.