Macrofinancial Causes of Optimism in Growth Forecasts

November 12, 2021

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Yan Carriere-Swallow, and José Marzluf. Macrofinancial Causes of Optimism in Growth Forecasts, (USA: International Monetary Fund, 2021) 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

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.

Subject: Credit, Credit booms, Fiscal consolidation, Fiscal multipliers, Fiscal policy, Money, Production, Production growth

Keywords: Credit, Credit booms, Credit growth, Credit-to-GDP gap, Financial markets and the macroeconomy, Fiscal consolidation, Fiscal multipliers, Global, Growth forecast, IMF's forecast, Macroeconomic forecasting, MONA database, Production growth, Program approval, Surveillance activity

Publication Details

Pages:

22
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2021/275
Stock No:

WPIEA2021275
ISBN:

9781616356392
ISSN:

1018-5941

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