Optimism Bias in Growth Forecasts—The Role of Planned Policy Adjustments
IMF Working Papers, November 8, 2020
Source details
- Canonical URL
- Optimism Bias in Growth Forecasts—The Role of Planned Policy Adjustments
Other formats
Bibliographic details
- Authors: Kareem Ismail, Roberto Perrelli, Jessie Yang
- Published: November 8, 2020
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513560373.001
Overview
- Research question: Are IMF growth forecasts systematically optimistic? What is the role of planned policy adjustments on this outcome? Are program forecasts as biased as surveillance forecasts?
- Approach: Analysis using a comprehensive database on IMF forecasts of economic growth in surveillance and program cases during 2003–2017.
- Key context: Examination of surveillance and program forecasts, including IMF non-concessional, non-precautionary financial arrangements.
Data and scope
- Sample period: 2003–2017
- Publication: IMF Working Papers, Working Paper No. 2020/229
- Pages: 25
- Issue: 229
- Volume: 2020
- DOI: https://doi.org/10.5089/9781513560373.001
- Authors: Kareem Ismail, Roberto Perrelli, Jessie Yang
- Date: November 8, 2020
- ISBN: 9781513560373
- ISSN: 1018-5941
Key findings
- Large planned fiscal and external adjustments are associated with optimistic growth projections.
- There are significant non-linearities for both program and surveillance cases.
- Specific evidence: Larger planned fiscal adjustment is associated with higher growth optimism in IMF non-concessional, non-precautionary financial arrangements.
- Time pattern: The tendency for optimism has persisted in the period after the Global Financial Crisis.
- Policy linkage: There is a strong correlation between the magnitude of the optimism and expected fiscal consolidation, which signals caution for post-COVID IMF projections as countries embark on fiscal adjustment.
Subject areas and keywords
- 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
Policy implications and cautions
- Planned fiscal consolidation may be correlated with optimistic growth forecasts; reliance on large planned adjustments could bias projected growth upward.
- The persistence of optimism after the Global Financial Crisis suggests vigilance is needed when interpreting projections tied to substantial policy adjustments.
- The strong correlation between optimism magnitude and expected fiscal consolidation provides a cautionary signal for post-COVID projections as countries implement fiscal adjustments.
Optimism Bias in Growth Forecasts—The Role of Planned Policy Adjustments; IMF Working Paper No. 2020/229; https://www.imf.org/en/publications/wp/issues/2020/11/08/optimism-bias-in-growth-forecasts-the-role-of-planned-policy-adjustments-49804
Content in this bundle
- Working Paper