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INTERNATIONAL MONETARY FUND
Macrofinancial Causes of Optimism in Growth Forecasts
Yan Carrière-Swallow and José Marzluf
WP/21/275
November
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© 2021 International Monetary Fund
Macrofinancial Causes of Optimism in Growth Forecasts
WP/21/275
Authors: Yan Carrière-Swallow and José Marzluf *
Authorized for publication by Martin Čihák
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.
Abstract
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 professsional forecasters compiled by Consensus Economics. We conclude that improved macrofinancial analysis represents a promising avenue for reducing over-optimism in growth forecasts.
| JEL Classification Numbers: | C53, E23, F33, F37 |
| Keywords: | Macroeconomic forecasting; Financial markets and the macroeconomy; Credit growth |
| Author’s E-Mail Address: | ycswallow@imf.org; jmarzluf@imf.org |
| JEL Classification Numbers: | C53, E23, F33, F37 |
| Keywords: | Macroeconomic forecasting; Financial markets and the macroeconomy; Credit growth |
| Author’s E-Mail Address: | ycswallow@imf.org; jmarzluf@imf.org |
We thank Martin Čihák, Atish Rex Ghosh, Divya Kirti, Paolo Mauro, Flavien Moreau, Francesco Luna, Roberto Perrelli, Jiří Podpiera, Yurii Sholomytskyi, Fabián Valencia, Mengxue Wang, Tim Willems, and seminar participants at the IMF’s Emerging Markets Forum and the IMF’s SPR Macrofinancial Unit for their valuable comments. We also thank Plamen Iossifov and Pavel Lukyantsau for generously sharing data. Remaining errors are our own.
