CFDP 1706

Analyzing Macroeconomic Forecastability

Author(s): 
Ray C. Fair

Publication Date: June 2009

Update Date: April 2010

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.

Keywords: 

Macroeconomic forecasting, Recessions, Booms

JEL Classification Codes:  E17