(wileyonlinelibrary.com) DOI: 10.1002/for.1216 Analyzing Macroeconomic Forecastability

This paper estimates, using stochastic simulation and a multi-country macro-econometric model, the fraction of the forecast error variance of output changes and the fraction of the forecast error variance of inflation that are due to unpre-dictable asset price changes. The results suggest that between about 25 % and 37 % of the forecast error variance of output growth over eight quarters is due to asset price changes and between about 33 % and 60 % of the forecast error variance of inflation over eight quarters is due to asset price changes. These esti-mates provide limits to the accuracy that can be expected from macroeconomic forecasting. Copyright © 2011 John Wiley & Sons, Ltd. KEY WORDS macroeconomic forecasting; asset price