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Optimism Bias in Growth Forecasts—The Role of Planned Policy Adjustments

Author

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  • Kareem Ismail
  • Mr. Roberto Perrelli
  • Jessie Yang

Abstract

Are IMF growth forecasts systematically optimistic? And if so, what is the role of planned policy adjustments on this outcome? Are program forecasts as biased as surveillance forecasts? We try to answer these questions using a comprehensive database on IMF forecasts of economic growth in surveillance and program cases during 2003–2017. We find that large planned fiscal and external adjustments are associated with optimistic growth projections, with significant non-linearities for both program and surveillance cases. Specifically, we find evidence that larger planned fiscal adjustment is associated with higher growth optimism in IMF non-concessional, non-precautionary financial arrangements. Our results show the tendency for optimism has persisted in the period after the Global Financial Crisis. Moreover, the strong correlation between the magnitude of the optimism and expected fiscal consolidation provides a cautionary signal for the post-COVID IMF projections as countries embark on a path of fiscal adjustment.

Suggested Citation

  • Kareem Ismail & Mr. Roberto Perrelli & Jessie Yang, 2020. "Optimism Bias in Growth Forecasts—The Role of Planned Policy Adjustments," IMF Working Papers 2020/229, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2020/229
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    Citations

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    Cited by:

    1. Eicher, Theo S. & Kawai, Reina, 2024. "Systemic bias of IMF reserve and debt forecasts for program countries," International Journal of Forecasting, Elsevier, vol. 40(3), pages 985-1001.
    2. Yan Carrière-Swallow & José Marzluf, 2023. "Macrofinancial Causes of Optimism in Growth Forecasts," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 71(2), pages 509-537, June.
    3. Fernando M. Martin & Juan M. Sanchez & Olivia Wilkinson, 2023. "The Economic Impact of COVID-19 around the World," Review, Federal Reserve Bank of St. Louis, vol. 105(2), pages 74-88, April.
    4. Eicher, Theo S. & Kawai, Reina, 2023. "IMF trade forecasts for crisis countries: Bias, inefficiency, and their origins," International Journal of Forecasting, Elsevier, vol. 39(4), pages 1615-1639.
    5. Frank, Luis, 2021. "¿Son sesgadas las proyecciones de WEO? El caso de la proyección de crecimiento de Argentina [Are the WEO forecasts biased? The case of Argentina's growth forecast]," MPRA Paper 114333, University Library of Munich, Germany.

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