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May 16, 2007
The Wisdom Of Forecasting Crowds (Such As It Is)
Ever wonder who you should turn to for expert economic prognostications? My colleagues Mike Bryan and Linsey Molloy (future Chicago MBA!) remind us that the answer is everybody and nobody:
... we examine economists' year-ahead growth and inflation predictions since 1983 to see whether any have distinguished themselves as particularly good (or bad) forecasters over time.
We find little evidence that any forecaster consistently predicts better than the consensus (median) forecast and, further, we find that forecasters who gave better-than-average predictions in one year were unable to sustain their superior forecasting performance—at least no more than random chance would suggest.
Not that consensus forecasts are all that great:
... we summarize the track record of the median economist’s year-ahead predictions for real GDP growth and CPI inflation since 1983. (Forecasts were compiled by the Livingston Survey.) If we arbitrarily define an accurate prediction as being within 1/2 percentage point of the realized outcome, we would say that since 1983 the median forecast was accurate in only seven years, or about 30 percent of the time... The accuracy of the median forecaster’s prediction of inflation was a bit better over the 23-year period. Inflation predictions were accurate—that is, within 1/2 percentage point of actual inflation—39 percent of the time...
... So suppose the median forecaster expects the economy to grow 3.4 percent next year (its average since 1983). You could conclude—with 90 percent confidence—that the economy will grow between a robust 5.8 percent and a sluggish 1 percent. Similarly, the RMSE of the median economist’s inflation prediction over this period was 1 percent, which means that given an average inflation rate of 3.1 percent, you could be about 90 percent confident that prices will rise between a stable 1.4 percent and an uncomfortably rapid 4.8 percent over the coming year.
Fair warning, I think.
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Forecast Accuracy and Consensus Forecasts
A recent report from the Cleveland Fed by Michael F. Bryan and Lindsey Molloy confirm older results that consensus forecasts do better than any one forecaster. (Hat tip to Macroblog.) That's one reason I pay close attention to consensus forecasts, [Read More]
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