Staff Studies for the World Economic Outlook, 1997

International Monetary Fund

• Publisher: INTERNATIONAL MONETARY FUND
• Year: 1998
• eBook ISBN: 9781557757012

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I How Accurate Are the IMF’s Short-Term Forecasts? Another Examination of the World Economic Outlook

Michael J. Artis

This paper analyzes the short-term forecasts for industrial and developing countries produced by the IMF and published twice a year in the World Economic Outlook. For the industrial country group, the forecasts for output growth and inflation are satisfactory and pass most conventional tests in forecasting economic developments, although forecast accuracy has not improved over time, and predicting the turning points of the business cycle remains a weakness. For the developing countries, the task of forecasting movements in economic activity is even more difficult and the conventional measures of forecast accuracy are less satisfactory than for the industrial countries. [JEL: E17, E37, F17, F47]

Basic Definitions and Methods of Evaluation

As in the previous studies mentioned earlier, this study employs two definitions of forecast horizon with corresponding outturn. The “paradigm” World Economic Outlook timetable provides for publication twice a year, in May and October; the forecasts themselves are finalized in April and September. Correspondingly, a “current-year forecast” is defined as the forecast for year x appearing in the May issue of the World Economic Outlook for year x. The outturn data, described as “first available estimates.” are taken from the issue of the World Economic Outlook appearing in May of year x + 1. Thus, the “current-year” forecast corresponds to a near-term forecast, made at a time when some data for the first quarter of the year in question are already on hand for most, though not all, countries; and the realization for the year as a whole is identified with the data available in the first publication of the following year. Next, a “year-ahead” forecast is also defined, which is of longer term. Thus, the “year-ahead” forecast for year x is found in the issue of the World Economic Outlook for October of year x − 1; the realization for this forecast is identified with the data published in the issue of the World Economic Outlook for October of year x + 1, These data are termed “first settled estimates.”

These definitions were first suggested by Kenen and Schwarz (1986) and were employed in the earlier study by Artis (1988). They provide for a test of the sensitivity of the forecast to its horizon. There is no clearly agreed definition of the “correct” vintage of realization data to employ. These data are continuously revised and the forecast postmortems are dependent, in detail, on the choice of data vintage made. A more common practice than that employed here is to use the latest available data—a mixed set of revision vintages. This reflects an understanding of the objective of forecasts, which is that they aim to “forecast the truth,” while the nearest to the revealed truth on hand at any time is the latest available set of data.² But this may not be the way in which the forecasts are evaluated by their constituency, where a higher premium on immediate predictive accuracy may be found. It is arguable that confronting the forecaster with the latest available set of realizations obliges him to forecast the data revision process as well as to predict the immediate evolution of the data he has available. In practice, there is probably little of general significance in the results that depends on the vintage of realization data employed.³ The definitions of forecast and outturn given above apply to “paradigm” World Economic Outlook publication schedules. In practice, and especially in the period before the forecasts were made public, the intervals between reporting are sometimes erratic and the interpretation of “current-year” and “year-ahead” forecasts with their associated outturn has to be adjusted correspondingly, See Artis (1996) for the precise sources of forecast and outturn data.

The World Economic Outlook forecasts are rich in detail. It would be excessively burdensome to process all the series for which forecasts are made. This paper concentrates on projections for GDP, inflation, the balance of payments, and the growth of imports and exports. These choices coincide with those made in the previous study. The most detailed forecasts are for the industrial countries group—specifically the seven major industrial countries, and the larger part of the study is devoted to them. For developing countries, the analysis is confined to regional aggregates.

The study examines the whole World Economic Outlook forecasting record from its inception in 1971 to 1994. The length of the series now available allows this study to examine whether any significant change has occurred in the IMF’s record over time, particularly in the interval since the previous study.

The literature is replete with a large number of suggested forecasting evaluation techniques (for a survey, see Wallis, 1989). Rationality considerations suggest that a “good” (rational) forecast should produce errors that are unbiased and display an absence of serial correlation: evidence to the contrary would suggest immediately that an improving correction could be made to the forecast process. In addition, it ought not to be possible to show that the forecast errors could be explained (hence potentially reduced) by taking account of any information available at the time the forecast was made (such as, for example, information provided by alternative forecasting procedures). The first two desiderata of a rational forecast can be tested for directly by applying the appropriate econometric procedures to the series of forecast errors. To test for the efficiency of the forecast procedure in the broader sense involves the evaluator in determining what might be critical information and testing to see whether indeed forecast error can be explained by it. An immediate difficulty is that the set of possibly relevant information is huge. Evaluators have generally concentrated on an easily available subset, stressing in particular the possible relevance of the forecast values themselves, and the forecasts that could have been produced by alternative naive—or not so naive—time series forecasts. The first set of information is exploited exclusively by the “realization-forecast” regression introduced by Mincer and Zamowitz (1969): this regression has the attractive property that it is clear what parameter restrictions would correspond to the perfect forecast. Results for this regression featured extensively in Artis (1988) and do so again in the current one.

Forecast evaluation traditionally looks to some alternative forecasting procedure to provide a benchmark against which to appraise the performance of the procedures under examination. One set of alternatives is provided by simple time series models. Traditionally, the potential contribution of alternative, naive models has been filtered through the Theil (1966) statistic, which is computed as the ratio of the root mean square error (RMSE) of the forecast in question to the RMSE of the naive alternative (in Theil’s original exposition the “no change” forecast). In practice, the naive alternative may be represent...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Contents
• Preface
• I. How Accurate Are the IMF’s Short-Term Forecasts? Another Examination of the World Economic Outlook
• II. IMF Estimates of Potential Output: Theory and Practice
• III. MultilatÉral Unit-Labor-Cost-Based Competitiveness Indicators for Advanced, Developing, and Transition Countries
• IV. Deindustrialization: Causes and Implications
• V. The Effect of Globalization on Wages in the Advanced Economies
• VI. International Labor Standards and International Trade
• VII. The Design of EMU
• VIII. Prices in the Transition: Ten Stylized Facts
• Footnotes