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Cover IMF Working Papers
A Simple Forecasting Accuracy Criterion Under Rational Expectations: Evidence From the World Economic Outlook and Time Series Models
Mr. José M. Barrionuevo
A simple criterion based on the properties of the forecast error is presented to evaluate the accuracy of forecasts. The efficiency conditions of an optimization problem are used to show that under rational expectations the standard statistical conditions are necessary, but not sufficient to ensure efficiency. This criterion is used to examine the accuracy of the World Economic Outlook projections of growth and inflation for the seven major industrial countries. Time series models are then estimated and the efficiency of the World Economic Outlook projections relative to a benchmark time series model is examined. A number of empirical tests suggest that the year ahead projections of growth and inflation in the World Economic Outlook are unbiased after 1982.
Keywords:
WP; time series model; least squares; random walk; time series forecast; Theil inequality statistic TS; inflation error; q statistic test; models of inflation; forecast error; Inflation; Production growth; Rational expectations; Industrial sector
Cover IMF Staff Papers
IMF Staff Papers, Volume 49, No. 1
Mr. Robert P Flood
This paper presents details of a symposium on forecasting performance I organized under the auspices of the IMF Staff Papers. The assumption that the forecaster's goal is to do as well as possible in predicting the actual outcome is sometimes questionable. ln the context of private sector forecasts, this is because the incentives for forecasters may induce them to herd rather than to reveal their true forecasts. Public sector forecasts may also be distorted, although for different reasons. Forecasts associated with IMF programs, for example, are often the result of negotiations between the IMF staff and the country authorities and are perhaps more accurately viewed as goals, or targets, rather than pure forecasts. The standard theory of time series forecasting involves a variety of components including the choice of an information set, the choice of a cost function, and the evaluation of forecasts in terms of the average costs of the forecast errors. It is generally acknowledged that by including more relevant information in the information set, one should be able to produce better forecasts.
Keywords:
SP; standard deviation; IMF projection; program projection; private sector forecast; consumption tax; group mean; panel money demand estimation; Real exchange rates; Purchasing power parity; Consumption taxes; Labor taxes; Exchange rates; East Asia; Eastern Europe; Europe; Global; Baltics
Cover IMF Working Papers
The Yield Curve and Real Activity
Zuliu Hu
The financial press frequently suggest that the shape of yield curve reflects information about the prospects of the economy. This paper attempts to formalize the link between the yield curve and the real economic activity. A closed-form formula for the term structure of interest rates is derived. It is shown that the term structure embodies the market’s expectation about changes in the macroeconomic fundamental--the growth in real aggregate output of the economy. The paper then documents the use of bond market data for predicting GDP growth in the G-7 industrial countries. The results suggest that a simple measure of the slope of the yield curve, namely the yield spread, serves as a good predictor of future economic growth. The out-of-sample forecasting performance of the yield spread compares favorably with that of the alternative stock price-based model and a univariate time series (ARMA) model. One practical implication is that it may be useful to add some measure of the term structure to the list of
Keywords:
WP; real GDP; government bond; time series; term structure; zero-coupon bond; structure model; covariance term; structure of interest rates; structure variable; Asset prices; Yield curve; Consumer price indexes; Short term interest rates; Production growth
Cover IMF Working Papers
Front Matter
Mr. José M. Barrionuevo

Front Matter Page Research Department Table of Contents Summary I. Introduction II. A Rational Expectations Restriction on Forecasting Optimality III. The Forecasting Accuracy of the World Economic Outlook 1. The overall period, 1971-91 2. Comparison of business cycles and recession years IV. Time Series Forecasts 1. Forecasting accuracy of time series models 2. Comparison of forecasts 3. An adjustment method V. Concluding Remarks Tables 1. Forecast Error Statistics for Output Growth 2. Forecast Error

Keywords:
WP; time series model; least squares; random walk
Cover IMF Working Papers
Where Should We Go? Internet Searches and Tourist Arrivals
Mr. Serhan Cevik
The widespread availability of internet search data is a new source of high-frequency information that can potentially improve the precision of macroeconomic forecasting, especially in areas with data constraints. This paper investigates whether travel-related online search queries enhance accuracy in the forecasting of tourist arrivals to The Bahamas from the U.S. The results indicate that the forecast model incorporating internet search data provides additional information about tourist flows over a univariate approach using the traditional autoregressive integrated moving average (ARIMA) model and multivariate models with macroeconomic indicators. The Google Trends-augmented model improves predictability of tourist arrivals by about 30 percent compared to the benchmark ARIMA model and more than 20 percent compared to the model extended only with income and relative prices.
Keywords:
WP; search data; tourist arrival; Internet search process; Google Trends data; internet search volume; arrivals to The Bahamas; Personal income; Tourism; Real effective exchange rates; Caribbean; Forecasting; tourist arrivals; Google Trends; time-series models
Cover IMF Working Papers
Yield Spread as a Leading Indicator of Real Economic Activity: An Empirical Exercise on the Indian Economy
Mr. Rajan Goyal and Mr. K. Kanagasabapathy
There is growing evidence that the yield spread could serve as a leading indicator of real economic activity. This paper is an attempt to test this hypothesis for the Indian economy by relating movements in the yield spread in the government securities market to movements in the index of industrial production. The results show that yield spread could, inter alia, be considered as a leading indicator of industrial activity in India.
Keywords:
WP; interest rate; market expectation; nominal interest rate; rupee yield curve; Yield curve; yield spread; leading indicators; government securities market; production function; secondary market yield; market player; financial market participant; Short term interest rates; Government securities; Real interest rates
Cover IMF Working Papers
Understanding the Costs of Deflation in the Japanese Context
Mr. Taimur Baig
This paper examines the cost of deflation in the context of Japan's ongoing deflationary episode. The impact of deflation owing to the zero interest rate bound on monetary policy, wage rigidity, redistribution of wealth from debtor to creditor, and inflexibilities in the financial sector are examined. It is seen that the generalized decline in the Japanese price level, however gradual or mild, has substantially exacerbated the economy's adjustment process under already difficult economic conditions.
Keywords:
WP; monetary policy; price; Deflation; Wage Rigidity; Financial Sector; Core CPI deflation; inflation expectation; aggregate demand; GDP deflator; debt-deflation theory; rising prices; unanticipated deflation; deflation pressure; monetary policy efficacy; Inflation; Asset prices; Consumer price indexes; Real interest rates