Volume 27 Issue 4 (October-December 2011)

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How accurate are government forecasts of economic fundamentals? The case of Taiwan

Chang, C.L. , Franses, P.H. , McAleer, M.
Pages 1066-1075

A government's ability to forecast key economic fundamentals accurately can affect business confidence, consumer sentiment, and foreign direct investment, among others. A government forecast based on an econometric model is replicable, whereas one that is not fully based on an econometric model is non-replicable. Governments typically provide non-replicable forecasts (or expert forecasts) of economic fundamentals, such as the inflation rate and real GDP growth rate. In this paper, we develop a methodology for evaluating non-replicable forecasts. We argue that in order to do so, one needs to retrieve from the non-replicable forecast its replicable component, and that it is the difference in accuracy between these two that matters. An empirical example to forecast economic fundamentals for Taiwan shows the relevance of the proposed methodological approach. Our main finding is that the undocumented knowledge of the Taiwanese government reduces forecast errors substantially.

Keywords: Government forecasts , Generated regressors , Replicable government forecasts , Non-replicable government forecasts , Initial forecasts , Revised forecasts
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