Title

Analyzing Macroeconomic Forecastability

Authors

Ray C. Fair

Document Type

Discussion Paper

Publication Date

6-1-2009

CFDP Number

1706

CFDP Update Date

2010-04-01

CFDP Pages

20

Abstract

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.

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