Forecast Performance in Times of Terrorism

Abstract

Governments, central banks, and private companies make extensive use of expert and market-based forecasts in their decision-making processes. These forecasts can be affected by terrorism, a factor that should be considered by decision-makers. We focus on terrorism as a mostly endogenously driven form of political uncertainty and assess the forecasting performance of market-based and professional inflation and exchange rate forecasts in Israel. We show that expert forecasts are better than market-based forecasts, particularly during periods of terrorism. However, the performance of both marketbased and expert forecasts is significantly worse during such periods. Thus, policymakers should be particularly attentive to terrorism when considering inflation and exchange rate forecasts.

Do expert experience and characteristics affect inflation forecasts?

“…There has been increasing interest in professional economic forecasts in recent decades, partly due to the increasing importance of expectations in modern workhorse macroeconomic models. In a few of the most active …elds, authors have compared private-sector and central bank professional forecasters (Romer and Romer, 2000;El-Shagi et al, 2016), and professional forecasts to market-implied forecasts (Adeney et al, 2017;Benchimol and El-Shagi, 2020). Others have assessed whether forecasts (or forecast spreads) incorporate information regarding macroeconomic uncertainty (Bachmann et al, 2013;Bloom, 2014;Rossi and Sekhposyan, 2015).…”

“…First, economic agents, including policymakers such as central banks, strongly rely on forecasts (Piotroski and Roulstone, 2004). Since expert forecasts are generally better than market-based forecasts (Adeney et al, 2017;Benchimol and El-Shagi, 2020), the economic agents mostly rely on the average of expert forecasts 1 (Genre 1 Although it is impossible to certify if the Fed decides according to expert forecasts, it is interesting to know how often the Fed often mentions expert forecasts. However, we can reasonably assume the Fed actively considers expert forecasts since the GFC, among other indicators, in their decision and communication processes.…”