HOW QUICKLY DO FORECASTERS INCORPORATE NEWS? Evidence from Cross-country Surveys

Using forecasts from Consensus Economics Inc., we provide evidence on the efficiency of real GDP growth forecasts by testing if forecast revisions are uncorrelated. As the forecast data used are multi-dimensional—18 countries, 24 monthly forecasts for the current and the following year and 16 target years—the panel estimation takes into account the complex structure of the variance covariance matrix due to propagation of shocks across countries and economic linkages among them. Efficiency is rejected for all 18 countries: forecast revisions show a high degree of serial correlation. We then develop a framework for characterizing the nature of the inefficiency in forecasts. For a smaller set of countries, the G-7, we estimate a VAR model on forecast revisions. The degree of inefficiency, as manifested in the serial correlation of forecast revisions, tends to be smaller in forecasts of the US than in forecasts for European countries. Our framework also shows that one of the sources of the inefficiency in a country’s forecasts is resistance to utilizing foreign news. Thus the quality of forecasts for many of these countries can be significantly improved if forecasters pay more attention to news originating from outside their respective countries. This is particularly the case for Canadian and French forecasts, which would gain by paying greater attention than they do to news from the United States and Germany respectively.