Forecasting the Covid-19 recession and recovery: Lessons from the financial crisis

Abstract

The purpose of the Working Papers is to disseminate the results of research conducted by CIRANO research members in order to solicit exchanges and comments. These reports are written in the style of scientific publications. The ideas and opinions expressed in these documents are solely those of the authors.Les cahiers de la série scientifique visent à rendre accessibles les résultats des recherches effectuées par des chercheurs membres du CIRANO afin de susciter échanges et commentaires. Ces cahiers sont rédigés dans le style des publications scientifiques et n'engagent que leurs auteurs.CIRANO is a private non-profit organization incorporated under the Quebec Companies Act. Its infrastructure and research activities are funded through fees paid by member organizations, an infrastructure grant from the government of Quebec, and grants and research mandates obtained by its research teams. Le CIRANO est un organisme sans but lucratif constitué en vertu de la Loi des compagnies duQuébec. Le financement de son infrastructure et de ses activités de recherche provient des cotisations de ses organisations-membres, d'une subvention d'infrastructure du gouvernement du Québec, de même que des subventions et mandats obtenus par ses équipes de recherche. CIRANO Partners -Les partenaires du CIRANO Corporate Partners -Partenaires corporatifs Autorité des marchés financiers Bank of Canada Bell Canada BMO Financial Group Business Development Bank of Canada Caisse de dépôt et placement du Québec

Forecasting in the Absence of Precedent

“…8 However, with the benefit of hindsight, we see that the model substantially underpredicts the initial decline in GDP but overpredicts the persistence of the decline in GDP growth, with forecast annualized declines of approximately 10% and 5% in 2020Q2 and 2020Q3, respectively, in contrast to the 33% decline and 38% increase in the data. Foroni et al (2020) forecast a decline in investment that had a trough level close to the data but overpredict the persistence of this decline. Their forecasts are roughly in line with the Schorfheide and Song (2020) April 2020 forecasts.…”

“…The forecast errors in Foroni et al (2020) are unsurprising ex post but might also be expected ex ante. The COVID-19 recession has been larger, more rapid, and less persistent than the Great Recession.…”

“…Their forecasts are roughly in line with the Schorfheide and Song (2020) April 2020 forecasts. Like Schorfheide and Song (2020), Foroni et al (2020) overpredict the decline of investment relative to GDP as they fail to acknowledge the differences in the COVID-19 recession.…”

“…One response to the shortcomings in Schorfheide and Song (2020) is to ask if there are historical episodes that can suggest where our current estimated model might make errors. To that end, Foroni et al (2020) adjust forecasts from various MF models using information from the Great Recession. The class of models used can be viewed as minor modifications of (1).…”

“…The class of models used can be viewed as minor modifications of (1). 7 In what follows, we reference our benchmark VAR model (1) instead of the actual models in Foroni et al (2020) in order to economize on notation and simplify the exposition. First, they compute similarity adjusted forecasts in which they increase the weight on observations from the Great Recession.…”