Can the IMF's Medium-Term Growth Projections Be Improved?

IMF Working Papers, October 1, 2004

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Numerous reports have noted that the IMF's medium-term growth projections are overly optimistic.
The authors estimate a growth model and examine its out-of-sample forecasting performance relative to IMF projections.
The model's projections outperform those of the IMF:
- Projections are less biased: one-quarter of the IMF bias.
- Projections have smaller standard errors: 20 percent lower root mean squared errors.
Outperformance holds in all regions and among most income groups.
Results persist even after controlling for the IMF's macroeconomic assumptions.
The paper does not attempt to address broader criticisms of the empirical growth literature, but suggests benefits from systematic analysis of cross-country information.

Estimation of a growth model constructed to produce out-of-sample projections.
Comparative evaluation of model projections versus IMF staff medium-term projections.
Controls included for IMF macroeconomic assumptions when assessing relative performance.

Bias comparison: model bias equals one-quarter of the IMF bias.
Precision comparison: model root mean squared errors are 20 percent lower than IMF projections.
Geographic and income coverage: outperformance documented in all regions and among most income groups.

Systematic, cross-country empirical analysis can improve medium-term growth projections relative to current IMF staff projections.
Incorporating model-based forecasting methods could reduce optimism bias and improve projection precision in IMF medium-term work.