Optimism Bias in Growth Forecasts—The Role of Planned Policy Adjustments

By Kareem Ismail, Roberto Perrelli, Jessie Yang

November 8, 2020

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Kareem Ismail, Roberto Perrelli, and Jessie Yang. Optimism Bias in Growth Forecasts—The Role of Planned Policy Adjustments, (USA: International Monetary Fund, 2020) 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

Are IMF growth forecasts systematically optimistic? And if so, what is the role of planned policy adjustments on this outcome? Are program forecasts as biased as surveillance forecasts? We try to answer these questions using a comprehensive database on IMF forecasts of economic growth in surveillance and program cases during 2003–2017. We find that large planned fiscal and external adjustments are associated with optimistic growth projections, with significant non-linearities for both program and surveillance cases. Specifically, we find evidence that larger planned fiscal adjustment is associated with higher growth optimism in IMF non-concessional, non-precautionary financial arrangements. Our results show the tendency for optimism has persisted in the period after the Global Financial Crisis. Moreover, the strong correlation between the magnitude of the optimism and expected fiscal consolidation provides a cautionary signal for the post-COVID IMF projections as countries embark on a path of fiscal adjustment.

Subject: Fiscal consolidation, Fiscal multipliers, GDP forecasting, Global financial crisis of 2008-2009, Oil prices

Keywords: Fiscal adjustment, Forecast error, IMF mission, IMF program document, IMF team, IMF-supported programs, Optimism bias, Optimism bias., Policy adjustment, WP

Publication Details

Pages:

25
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2020/229
Stock No:

WPIEA2020229
ISBN:

9781513560373
ISSN:

1018-5941

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