Macroeconomic forecasts: an empirical test of rationality and parameter stability

Abstract

The consistency property of a select group of macroeconomic variables, representing both the real and the financial sector of the economy, is re-examined. Consistency is a precondition to rationality in the expectation formation process. The theoretical foundations are similar to those used to study exchange rate expectations. A very reliable and continuous data set, the ASA-NBER survey, is used, which has forecasts over multiple horizons. The Hansen test, which has the dual advantage of being a test of parameter stability over time and also examines the cointegration properties of the actual and forecast series using the modern null of cointegration approach, was applied. This is able to distinguish between unit root and near unit root processes, which is of vital interest in cases of near stationarity. Results show that experts' predictions are inconsistent over all time horizons in the data set.