Skip to main content

Advertisement

SpringerLink
Log in

The diversity of forecasts from macroeconomic models of the US economy

  • Symposium
  • Published:
Economic Theory Aims and scope Submit manuscript

Abstract

This paper investigates the accuracy and heterogeneity of output growth and inflation forecasts during the current and the four preceding NBER-dated US recessions. We generate forecasts from six different models of the US economy and compare them to professional forecasts from the Federal Reserve’s Greenbook and the Survey of Professional Forecasters (SPF). The model parameters and model forecasts are derived from historical data vintages so as to ensure comparability to historical forecasts by professionals. The mean model forecast comes surprisingly close to the mean SPF and Greenbook forecasts in terms of accuracy even though the models only make use of a small number of data series. Model forecasts compare particularly well to professional forecasts at a horizon of three to four quarters and during recoveries. The extent of forecast heterogeneity is similar for model and professional forecasts but varies substantially over time. Thus, forecast heterogeneity constitutes a potentially important source of economic fluctuations. While the particular reasons for diversity in professional forecasts are not observable, the diversity in model forecasts can be traced to different modeling assumptions, information sets and parameter estimates.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

References

  • Adolfson, M., Andersson, M.K., Linde, J., Villani, M., Vredin, A.: Modern forecasting models in action: improving macroeconomic analyses at central banks. Sveriges Riksbank Working Paper No. 190 (2005)

  • An S., Schorfheide F.: Bayesian analysis of DSGE models. Economet Rev 26(2–4), 113–172 (2007)

    Article  Google Scholar 

  • Bernanke B.S., Boivin J.: Monetary policy in a data-rich environment. J Monet Econ 50(3), 525–546 (2003)

    Google Scholar 

  • Branch, W.A., Evans, G.W.: Monetary policy with heterogeneous expectations. Econ Theory (2010, this volume)

  • Branch, W.A., McGough, B.: Business cycle amplification with heterogeneous expectations. Econ Theory (2010, this volume)

  • Brock W., Hommes C.: Heterogeneous beliefs and routes to chaos in a simple asset pricing model. J Econ Dyn Control 22, 1235–1274 (1998)

    Article  Google Scholar 

  • Bryant, R., Currie, D., Frenkel, J., Masson, P., Portes, R. (eds.): Macroeconomic Policies in an Interdependent World. Washington, D.C.: The Brookings Institution (1989)

  • Bryant, R., Henderson, D.W., Holtham, G., Hooper, P., Symansky, S.A. (eds): Empirical Macroeconomics for Interdependent Economies. The Brookings Institution, Washington, D.C. (1988)

    Google Scholar 

  • Bryant, R., Hooper, P., Mann, C. (eds): Evaluating Policy Regimes: New Research in Empirical Macroeconomics. The Brookings Institution, Washington, DC. (1993)

    Google Scholar 

  • Capistran C., Timmermann A.: Disagreement and biases in inflation expectations. J Money Credit Banking 41, 365–396 (2009)

    Article  Google Scholar 

  • Chiarella C., Dieci R., He X.-Z.: Heterogeneous expectations and speculative behavior in a dynamic multi-asset framework. J Econ Behav Organ 62, 408–427 (2007)

    Article  Google Scholar 

  • Christiano L.J., Eichenbaum M., Evans C.L.: Nominal rigidities and the dynamic effects of a shock to monetary policy. J Political Econ 113(1), 1–45 (2005)

    Article  Google Scholar 

  • Christoffel, K., Coenen, G., Warne, A.: The new area-wide model of the euro area—a micro-founded open-economy model for forecasting and policy analysis. European Central Bank Working Paper 944 (2008)

  • Clements M.P.: Explanations of the inconsistencies in survey respondents’ forecasts. Eur Econ Rev 54(4), 536–549 (2010)

    Article  Google Scholar 

  • De Grauwe, P.: Animal spirits and monetary policy. Econ Theory (2010, this volume)

  • Del Negro M., Schorfheide F.: Priors from general equilibrium models for VARs. Int Econ Rev 45(2), 643–673 (2004)

    Article  Google Scholar 

  • Del Negro M., Schorfheide F., Smets F., Wouters R.: On the fit of New Keynesian models. J Bus Econ Stat 25(2), 123–143 (2007)

    Article  Google Scholar 

  • Doan T., Litterman R., Sims C.: Forecasting and conditional projection using realistic prior distributions. Econom Rev 3, 1–100 (1984)

    Article  Google Scholar 

  • Edge, R.M., Kiley, M.T., Laforte, J.-P.: Documentation of the research and statistics divisions estimated DSGE model of the U.S. economy: 2006 version. FEDS Working Paper (2007)

  • Edge R.M., Kiley M.T., Laforte J.-P.: Natural rate measures in an estimated DSGE model of the U.S. economy. J Econ Dyn Control 32, 2512–2535 (2008)

    Article  Google Scholar 

  • Edge R.M., Kiley M.T., Laforte J.-P.: A comparison of forecast performance between Federal Reserve staff forecasts, simple reduced form models, and a DSGE model. J Appl Econom 25(4), 720–754 (2010)

    Article  Google Scholar 

  • Engelberg, J., Manski, C.F., Williams, J.: Assessing the temporal variation of macroeconomic forecasts by a panel of changing composition. Northwestern University Working Paper (2009)

  • Faust J., Wright J.H.: Comparing Greenbook and reduced form forecasts using a large realtime dataset. J Bus Econ Stat 27(4), 468–479 (2009)

    Article  Google Scholar 

  • Francis, N., Ramey, V.A.: Measures of per capita hours and their implications for the technology-hours debate. NBER Working Paper 11694 (1995)

  • Fuhrer J.C.: Inflation/output variance trade-offs and optimal monetary policy. J Money Credit Banking 29(2), 214–234 (1997)

    Article  Google Scholar 

  • Fuhrer J.C., Moore G.: Inflation persistence. Q J Econ 110(1), 127–159 (1995a)

    Article  Google Scholar 

  • Fuhrer J.C., Moore G.: Monetary policy trade-offs and the correlation between nominal interest rates and real output. Am Econ Rev 85(1), 219–239 (1995b)

    Google Scholar 

  • Giannone D., Monti F., Reichlin L.: Incorporating conjunctural analysis in structural models. In: Wieland, V. (eds) The Science and Practice of Monetary Policy Today, pp. 41–57. Springer Science, Berlin (2009)

    Google Scholar 

  • Giordani P., Söderlind P.: Inflation forecast uncertainty. Eur Econ Rev 47, 1037–1059 (2003)

    Article  Google Scholar 

  • Goodfriend M., King R.G.: The new neoclassical synthesis and the role of monetary policy. In: Bernanke, B.S., Rotemberg, J.J. (eds) National Bureau of Economic Research Macroeconomics Annual 1997, MIT Press, Cambridge (1997)

    Google Scholar 

  • Guo, W.C., Wang, F.Y., Wu, H.M.: Financial leverage and market volatility with diverse beliefs. Econ Theory (2010, this volume)

  • Hamilton J.D.: Time Series Analysis. Princeton University Press, Princeton (1994)

    Google Scholar 

  • Kimball M.: The quantitative analytics of the basic monetarist model. J Money Credit Banking 27(4), 1241–1277 (1995)

    Article  Google Scholar 

  • Klein, L. (eds): Comparative Performance of U.S. Econometric Models. Oxford University Press, Oxford (1991)

    Google Scholar 

  • Kurz M.: On rational belief equilibria. Econ Theory 4, 859–876 (1994a)

    Article  Google Scholar 

  • Kurz M.: On the structure and diversity of rational beliefs. Econ Theory 4, 877–900 (1994b)

    Article  Google Scholar 

  • Kurz M.: Rational beliefs and endogenous uncertainty: an introduction. Econ Theory 8, 383–397 (1996)

    Google Scholar 

  • Kurz, M.: Endogenous economic fluctuations and rational beliefs: a general perspective. In: Kurz, M. (ed.) Endogenous Economic Fluctuations: Studies in the Theory of Rational Beliefs. Springer Series in Economic Theory, No. 6. Berlin: Springer (1997a)

  • Kurz, M. (ed.): Endogenous Economic Fluctuations: Studies in the Theory of Rational Beliefs. Springer Series in Economic Theory, No. 6. Berlin: Springer (1997b)

  • Kurz M.: Rational diverse beliefs and market volatility. In: Hens, T., Schenk-Hoppe, K. (eds) Handbook of Financial Markets: Dynamics and Evolution, North-Holland, Amsterdam (2009)

    Google Scholar 

  • Kurz, M., Jin, H., Motolese, M.: Knowledge, Information and Expectations in Modern Macroeconomics: Essays in Honor of Edmund S. Phelps. Endogenous Fluctuations and the Role of Monetary Policy, chap. 10, pp. 188–227. Princeton: Princeton University Press (2003)

  • Kurz M., Jin H., Motolese M.: The role of expectations in economic fluctuations and the efficacy of monetary policy. J Econ Dyn Control 29, 2017–2065 (2005)

    Article  Google Scholar 

  • Kurz, M., Motolese, M.: Diverse beliefs and time variability of risk premia. Econ Theory (2010, this volume)

  • Lamont O.A.: Macroeconomic forecasts and microeconomic forecasters. J Econ Behav Organ 48(3), 265–280 (2002)

    Article  Google Scholar 

  • Laster D., Bennett P., Geoum I.S.: Rational bias in macroeconomic forecasts. Q J Econ 114(1), 293–318 (1999)

    Article  Google Scholar 

  • Mankiw N.G., Reis R.: Sticky information in general equilibrium. J Eur Econ Assoc 5(2–3), 603–613 (2007)

    Article  Google Scholar 

  • Mankiw N.G., Reis R., Wolfers J.: Disagreement about inflation expectations. In: Gertler, M., Rogoff, K. (eds) NBER Macroeconomics Annual 2003, vol. 18, pp. 209–248. MIT Press, Cambridge (2004)

    Google Scholar 

  • Mishkin F.: Discussion of ‘Disagreement about inflation expectations’ by N. Gregory Mankiw, Ricardo Reis, Justin Wolfers. In: Gertler, M., Rogoff, K. (eds) NBER Macroeconomics Annual 2003, vol. 18, pp. 257–268. MIT Press, Cambridge (2004)

    Google Scholar 

  • Nielsen, C.K.: Price stabilizing, pareto improving policies. Econ Theory (2010, this volume)

  • Romer C.D., Romer D.H.: Federal reserve information and the behavior of interest rates. Am Econ Rev 90, 429–457 (2000)

    Article  Google Scholar 

  • Rotemberg J.J., Woodford M.: An optimization-based econometric framework for the evaluation of monetary policy. In: Bernanke, B., Rotemberg, J. (eds) NBER Macroeconomics Annual, The MIT Press, London (1997)

    Google Scholar 

  • Scharfstein D.S., Stein J.C.: Herd behavior and investment. Am Econ Rev 80(3), 465–479 (1990)

    Google Scholar 

  • Sims C.A.: The role of models and probabilities in the monetary policy process. Brookings Pap Econ Act 2, 1–40 (2002)

    Article  Google Scholar 

  • Smets F., Wouters R.: An estimated dynamic stochastic general equilibrium model of the euro area. J Eur Econ Assoc 1(5), 1123–1175 (2003)

    Article  Google Scholar 

  • Smets F., Wouters R.: Forecasting with a Bayesian DSGE model: an application to the euro area. J Common Market Stud 42(4), 841–867 (2004)

    Article  Google Scholar 

  • Smets F., Wouters R.: Shocks and frictions in US business cycles: a Bayesian DSGE approach. Am Econ Rev 97(3), 586–606 (2007)

    Article  Google Scholar 

  • Taylor J.B.: Estimation and control of a macroeconomic model with rational expectations. Econometrica 47(5), 1267–1286 (1979)

    Article  Google Scholar 

  • Taylor J.B.: Macroeconomic Policy in a World Economy. W.W. Norton, New York (1993)

    Google Scholar 

  • Taylor, J.B., Wieland, V.: Surprising comparative properties of monetary models: results from a new data base. NBER Working Paper 14849 (2009)

  • Walsh C.E.: Monetary Theory and Policy. The MIT Press, Cambridge (2003)

    Google Scholar 

  • Wang M.-C.: Comparing the DSGE model with the factor model: an out-of-sample forecasting experiment. J Forecast 28(2), 167–182 (2009)

    Article  Google Scholar 

  • Wieland, V. (eds): The Science and Practice of Monetary Policy Today. Springer Science, Berlin (2009)

    Google Scholar 

  • Wieland, V., Cwik, T., Müller, G.J., Schmidt, S., Wolters, M.: A new comparative approach to macroeconomic modeling and policy analysis. Manuscript, Center for Financial Studies, Frankfurt (2009)

  • Williams J.C.: Discussion of ‘Disagreement about inflation expectations’ by N. Gregory Mankiw, Ricardo Reis, and Justin Wolfers. In: Gertler, M., Rogoff, K. (eds) NBER Macroeconomics Annual 2003, vol. 18, pp. 257–268. MIT Press, Cambridge (2004)

    Google Scholar 

  • Woodford M.: Interest and Prices: Foundations of a Theory of Monetary Policy. Princeton University Press, Princeton (2003)

    Google Scholar 

Download references

Author information

Authors and Affiliations

  1. Goethe University of Frankfurt, CEPR and CFS, Grueneburgplatz 1, House of Finance, 60323, Frankfurt am Main, Germany

    Volker Wieland

  2. Goethe University of Frankfurt, Grueneburgplatz 1, House of Finance, 60323, Frankfurt am Main, Germany

    Maik H. Wolters

Authors
  1. Volker Wieland
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Maik H. Wolters
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Volker Wieland.

Additional information

We are grateful to Mordecai Kurz, two anonymous referees and the participants at the Stanford Institute for Theoretical Economics Workshop on Diverse Beliefs and the MONFISPOL Network’s Stresa workshop for very helpful comments on this paper. The usual disclaimer applies.

Rights and permissions

Reprints and permissions

About this article

Cite this article

Wieland, V., Wolters, M.H. The diversity of forecasts from macroeconomic models of the US economy. Econ Theory 47, 247–292 (2011). https://doi.org/10.1007/s00199-010-0549-7

Download citation

  • Received:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s00199-010-0549-7

Keywords

JEL Classification

Search

Navigation