Macrofinancial Causes of Optimism in Growth Forecasts

Macrofinancial Causes of Optimism in Growth Forecasts
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Volume/Issue: Volume 2021 Issue 275
Publication date: November 2021
ISBN: 9781616355791
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Topics covered in this book

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Economics- Macroeconomics , Money and Monetary Policy , Economics / General , Macroeconomic forecasting , Financial markets and the macroeconomy , Credit growth , IMF's forecast , credit-to-GDP gap , growth forecast , program approval , MONA database , surveillance activity , Fiscal consolidation , Credit , Credit booms , Production growth , Fiscal multipliers , Global

Summary

We analyze the causes of the apparent bias towards optimism in growth forecasts underpinning the design of IMF-supported programs, which has been documented in the literature. We find that financial variables observable to forecasters are strong predictors of growth forecast errors. The greater the expansion of the credit-to-GDP gap in the years preceding a program, the greater its over-optimism about growth over the next two years. This result is strongest among forecasts that were most optimistic, where errors are also increasing in the economy’s degree of liability dollarization. We find that the inefficient use of financial information applies to growth forecasts more broadly, including the IMF’s forecasts in the World Economic Outlook and those produced by professional forecasters compiled by Consensus Economics. We conclude that improved macrofinancial analysis represents a promising avenue for reducing over-optimism in growth forecasts.