ARE FORECASTS REALLY RATIONAL? ASSESSING PROFESSIONAL MACROECONOMIC FORECASTS FROM THE G7 COUNTRIES

Abstract. In this paper, we use survey data to analyze the rationality of professional macroeconomic forecasts. We analyze both individual forecasts and average forecasts. We provide evidence on the properties of forecasts for all the G7 counties and four differ-ent macroeconomic variables. Furthermore, we present a modification to the structural model which is commonly used to model the forecast errors of fixed event forecasts in the literature. Our results confirm that average forecasts should be used with caution, since even if all individual forecasts are rational the hypothesis of rationality is often rejected by the aggregate forecasts. We find that there are not only large differences in the performance of forecasters across countries but also across different macroeconomic variables; in general, forecasts tend to be biased in situations where forecasters have to learn about large structural shocks or gradual changes in the trend of a variable