Overfitting in Judgment-based Economic Forecasts: The Case of IMF Growth Projections

December 7, 2018

Preview Citation

Format: Chicago

Klaus-Peter Hellwig. Overfitting in Judgment-based Economic Forecasts: The Case of IMF Growth Projections, (USA: International Monetary Fund, 2018) accessed October 6, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

I regress real GDP growth rates on the IMF’s growth forecasts and find that IMF forecasts behave similarly to those generated by overfitted models, placing too much weight on observable predictors and underestimating the forces of mean reversion. I identify several such variables that explain forecasts well but are not predictors of actual growth. I show that, at long horizons, IMF forecasts are little better than a forecasting rule that uses no information other than the historical global sample average growth rate (i.e., a constant). Given the large noise component in forecasts, particularly at longer horizons, the paper calls into question the usefulness of judgment-based medium and long-run forecasts for policy analysis, including for debt sustainability assessments, and points to statistical methods to improve forecast accuracy by taking into account the risk of overfitting.

Subject: Economic forecasting, Emerging and frontier financial markets, Financial markets, Foreign exchange, Income, National accounts, Personal income, Population and demographics, Population growth, Real exchange rates

Keywords: Area inflation dynamics, Bootstrapped sample, Copyright page, Emerging and frontier financial markets, Euro area inflation dynamics, Forecasting, GDP growth, Global, Growth projection, IMF growth projection, Income, Inflation dynamics, LASSO coefficient, Machine learning, Personal income, Population growth, Real exchange rates, Shrinkage coefficient, WEO forecast, WP

Publication Details

Pages:

43
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2018/260
Stock No:

WPIEA2018260
ISBN:

9781484386187
ISSN:

1018-5941

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