Ms. Piyabha Kongsamut, Mr. Christian Mumssen, Anne-Charlotte Paret, and Mr. Thierry Tressel
How can information on financial conditions be used to better understand macroeconomic
developments and improve macroeconomic projections? We investigate this question for France
by constructing country-specific financial conditions indices (FCIs) that are tailored to movements
in GDP, investment, private consumption and exports respectively. We rely on a VAR approach to
estimate the weights of the financial components of each FCI, including equity market returns
(which turn out having a relatively strong weight across all FCIs), private sector risk premiums,
long-term interest rates, and banks’ credit standards. We find that the tailored FCIs are useful as
leading indicators of GDP, investment, and exports, and as a contemporaneous indicator of private
consumption. Credit volumes turn out to be lagging indicators of growth. The indices inform us on
macro-financial linkages in France and are used to improve the accuracy of quarterly forecasting
models and high-frequency “nowcast” models. We show that FCI-augmented models could have
significantly improved forecasts during and after the global financial crisis.
This paper analyzes the short-term forecasts for industrial and developing countries produced by the International Monetary Fund, and published twice a year in the World Economic Outlook (WEO). For the industrial country group, the WEO forecasts for output growth and inflation are satisfactory and pass most conventional tests in forecasting economic developments, although forecast accuracy has not improved over time, and predicting the turning points of the business cycle remains a weakness. For the developing countries, the task of forecasting movements in economic activity is even more difficult and the conventional measures of forecast accuracy are less satisfactory than for the industrial countries.
This paper examines the World Economic Outlook forecasting record for the principal performance indicators for the major industrial countries and corresponding aggregates and for groups of non-oil developing countries. Several criteria were used in evaluating the forecasts: the computation and evaluation of various summary statistics of forecast accuracy, bias, and efficiency; comparisons with alternative forecasts—naive forecasts and forecasts produced by the Organization for Economic Cooperation and Development (OECD) and by national forecasting agencies; the examination of turning-point errors and forecast performance in defined episodes; and, finally, some attempt to explain forecast error in terms of unanticipated developments in policy variables and oil prices. In judging the forecast performance of the World Economic Outlook, a number of points must be kept in mind. Most important, it has to be recognized that the period since the inception of the World Economic Outlook as a regular forecasting exercise has been extraordinarily rich in economic upheavals, which have made the odds against accurate forecasting formidable.