Shocking! Do forecasters share a common belief?1

¹The views presented in this article are those of the authors and do not necessarily reflect those of the DIW Berlin or the Deutsche Bundesbank.

Abstract

We evaluate the interaction of inflation and growth forecast errors based on 17 distinct forecasts for the German economy for the period from 1970 to 2004. The forecasts were produced by 14 institutions. Our findings show that, in general, the forecasters did not share a common belief about the shocks driving the economy at the time at which they made their forecasts. We use a standard textbook aggregate-demand/aggregate-supply curve to identify the nature of the shocks expected by the forecasters. This exercise reveals that the forecasters have very divergent expectations regarding the nature of the shocks predicted to hit the economy in the coming year. Moreover, the lion's share of forecast errors can be attributed to unexpected demand shocks.

¹The views presented in this article are those of the authors and do not necessarily reflect those of the DIW Berlin or the Deutsche Bundesbank.

Notes

¹The views presented in this article are those of the authors and do not necessarily reflect those of the DIW Berlin or the Deutsche Bundesbank.

²Sources and details regarding the forecasts under investigation and the figures for the final outcome can be found in Döpke and Fritsche (2004).

³We assume that the economy fluctuates around a steady state growth rate and a steady state inflation rate. Therefore, we transpose the standard textbook model from the output-price locus into the growth-inflation nexus. For a similar analysis based on just one institution, see Döpke (2000).