Currency crises, uncertain fundamentals and private-sector forecasts

Abstract

The cross-sectional dispersion of private-sector forecasts has been used in recent research on currency crises as a measure of uncertainty over expected fundamentals. We argue that the cross-sectional dispersion of private-sector forecasts need not only reflect uncertainty over expected fundamentals but may also arise due to a deliberate scattering of forecasts. Using data on foreign exchange (FX) reserve forecasts for 11 South-American and Eastern-European countries, we report evidence of such a forecast scattering that seems more pronounced during the economic crisis of 2008/09.

Keywords:

• currency crises
• uncertainty
• private-sector forecasts

JEL Classification:

• F37
• D84
• F31

Acknowledgement

We are grateful to the European Central Bank for providing the data set.

Notes

¹ Because forecasters simultaneously issue their forecasts, we used the consensus forecast of the previous survey and combined forecasts such that the forecasting horizon of current year forecasts exactly matches the forecasting horizon of next year forecasts. For January forecasts, we used the next year forecast of the preceding period. The lagged next year consensus forecast is in the information set of the forecasters when making their current year forecasts, and the forecasting horizon is identical. Additionally, we computed the lagged consensus forecast excluding the forecasters' own projection of the previous survey. Hence, we obtained a forecaster-specific consensus forecast.

² Data for some South-American economies were not available between 2000 and 2006. For a more detailed description of the data set, see http://www.consensuseconomics.com.