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Analyzing Macroeconomic Forecastability

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  • Ray Fair

Abstract

This paper examines whether recessions and booms are forecastable under the assumption that equity prices, housing prices, import prices, exports, and random shocks are not. Each of the 214 eight-quarter periods within the overall 1954:1-2009:1 period is examined regarding predictions of output growth and inflation. The results for low output growth vary by recession - there is no common pattern. Of the eight recessions, three are forecast well. For four of the five that are not, the main reason for each is not knowing: 1) the random shocks, 2) import prices and equity prices, 3) exports, and 4) exports and equity prices. For the fifth - the last one - all five components are large contributors, including housing prices: a perfect storm.

Suggested Citation

  • Ray Fair, 2009. "Analyzing Macroeconomic Forecastability," Yale School of Management Working Papers amz2443, Yale School of Management, revised 01 Oct 2009.
    • Handle: RePEc:ysm:wpaper:amz2443
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    File URL: https://repec.som.yale.edu/icfpub/publications/2443.pdf
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    References listed on IDEAS

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    3. Rudebusch, Glenn D. & Williams, John C., 2009. "Forecasting Recessions: The Puzzle of the Enduring Power of the Yield Curve," Journal of Business & Economic Statistics, American Statistical Association, vol. 27(4), pages 492-503.
    4. Ireland, Peter N., 2004. "A method for taking models to the data," Journal of Economic Dynamics and Control, Elsevier, vol. 28(6), pages 1205-1226, March.
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