Overfitting in Judgment-based Economic Forecasts: The Case of IMF Growth Projections

Download or read book Overfitting in Judgment-based Economic Forecasts: The Case of IMF Growth Projections written by Klaus-Peter Hellwig and published by International Monetary Fund. This book was released on 2018-12-07 with total page 43 pages. Available in PDF, EPUB and Kindle. Book excerpt: I regress real GDP growth rates on the IMF’s growth forecasts and find that IMF forecasts behave similarly to those generated by overfitted models, placing too much weight on observable predictors and underestimating the forces of mean reversion. I identify several such variables that explain forecasts well but are not predictors of actual growth. I show that, at long horizons, IMF forecasts are little better than a forecasting rule that uses no information other than the historical global sample average growth rate (i.e., a constant). Given the large noise component in forecasts, particularly at longer horizons, the paper calls into question the usefulness of judgment-based medium and long-run forecasts for policy analysis, including for debt sustainability assessments, and points to statistical methods to improve forecast accuracy by taking into account the risk of overfitting.