Macrofinancial Causes of Optimism in Growth Forecasts
IMF Working Papers, November 12, 2021
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Bibliographic details
- Authors: Yan Carriere-Swallow, José Marzluf
- Published: November 12, 2021
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781616356392.001
Main findings
- 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.
- Over-optimism is strongest among forecasts that were most optimistic.
- Among the most optimistic forecasts, errors are also increasing in the economy’s degree of liability dollarization.
- Improved macrofinancial analysis represents a promising avenue for reducing over-optimism in growth forecasts.
Broader evidence and robustness
- The inefficient use of financial information applies beyond IMF-supported programs:
- It also applies to the IMF’s forecasts in the World Economic Outlook.
- It also applies to forecasts produced by professional forecasters compiled by Consensus Economics.
Policy implications and recommendations
- Integrate observable financial variables (e.g., credit-to-GDP gap, indicators of liability dollarization) systematically into growth forecasting frameworks used for program design.
- Prioritize macrofinancial analysis to reduce optimism bias in short-run (next two years) growth projections that underpin program design and policy decisions.
- Pay particular attention to economies with recent expansions in the credit-to-GDP gap and higher degrees of liability dollarization when assessing forecast uncertainty and downside risks.
Research scope and context
- Work examines growth forecasts underpinning IMF-supported programs and assesses links between forecast errors and macrofinancial conditions observable to forecasters.
- Finds consistent patterns across IMF program forecasts, World Economic Outlook forecasts, and Consensus Economics professional forecasts.
- Conclusion emphasizes the potential for better macrofinancial analysis to improve forecasting accuracy.
Source: "Macrofinancial Causes of Optimism in Growth Forecasts", Yan Carriere-Swallow and José Marzluf, November 12, 2021, IMF Working Paper No. 2021/275.
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