Electoral Cycles in Macroeconomic Forecasts
This paper documents the existence of Political Forecast Cycles. In a theoretical model of political selection, we show that governments release overly optimistic GDP growth forecasts ahead of elections to increase the reelection probability. The bias arises from lack of commitment if voters are rational and from manipulation of voters’ beliefs if they do not expect the incumbent to be biased. Using high-frequency forecaster-level data from the United States, the United Kingdom, and Sweden, we document that governments overestimate short-term GDP growth by 10 to 13 percent during campaign periods.
Biased Forecasts to Affect Voting Decisions? The Brexit Case
This paper introduces macroeconomic forecasters as political agents and suggests that they use their forecasts to influence voting outcomes. We develop a probabilistic voting model in which voters do not have complete information about the future states of the economy and have to rely on macroeconomic forecasters. The model predicts that it is optimal for forecasters with economic interest (stakes) and influence to publish biased forecasts prior to a referendum. We test our theory using high-frequency data at the forecaster level surrounding the Brexit referendum. The results show that forecasters with stakes and influence released much more pessimistic and incorrect estimates for GDP growth subject to the leave outcome than other forecasters.
Inefficient Use of Competitors’ Forecasts?
Do forecasters use competitors’ forecasts efficiently? Empirical results using a large panel of forecasters suggest that forecasters underuse information from their competitors in their estimates for the current and next year’s annual GDP growth and inflation. The results also show that forecasters pay more attention to their competitors when releasing short-term forecasts compared to medium-term forecasts. A baseline model with noisy and private information supports the underuse interpretation and predicts that it is optimal to pay considerable attention to competitors’ work. The theoretical framework also rules out overconfidence as the primary explanation of the observed behavior. When the model is extended to include a revision cost, it can only explain the observed inefficiency and horizon dependency if asymmetric horizon discounting between revisions and forecast errors is assumed.
Withering Cash: Is Sweden ahead of the curve or just special?
Cash in circulation has increased in most countries but has fallen dramatically in Sweden. We explore the drivers behind this development using panel data consisting of 129 countries. In line with the previous literature, we find that GDP, demography, and the interest rate are key explanatory variables. A new finding is that lower corruption is associated with lower demand for cash in developed countries. Our empirical model performs relatively well in explaining the developments in most OECD countries. However, our model cannot explain the divergent Swedish development. We argue that a unique combination of events and policy measures has led to the decline of cash in Sweden.
(with Hanna Armelius and Carl Andreas Claussen) Latest version Sveriges Riksbank Working Paper Series (August 2020) VoxEU.org Column (Sep. 2020)
Adjusting for Information Content when Comparing Forecast PerformanceJournal of Forecasting, 36, 784–794, 2017
Cross‐institutional forecast evaluations may be severely distorted by the fact that forecasts are made at different points in time and therefore with different amounts of information. This paper proposes a method to account for these differences when analyzing an unbalanced panel of forecasts. The method computes the timing effect and the forecaster's ability simultaneously. Monte Carlo simulation demonstrates that evaluations that do not adjust for the differences in information content may be misleading. In addition, the method is applied to a real‐world dataset of 10 Swedish forecasters for the period 1999–2015. The results show that the ranking of the forecasters is affected by the proposed adjustment.
Kommentar på Johan Lönnroths artikel "Brev till den parlamentariska riksbankskommittén"Ekonomisk Debatt 5/2018 (with Jesper Lindé)Swedish
Do Swedish Forecasters Properly Account for Sweden’s International Dependence?Sveriges Riksbank Economic Review 2017:2 (with Jesper Lindé)English, Swedish
It’s a myth that the Riksbank’s forecasts have been governed by modelsSveriges Riksbank Economic Review 2017:1 (with Jesper Lindé)English, Swedish
En myt att Riksbankens prognoser styrts av modellerEkonomisk Debatt 8/2016 (with Jesper Lindé)Swedish
An assessment of the Riksbank’s international forecastsEconomic Commentaries, No. 14, 2015, Sveriges Riksbank (with Ted Aranki)English, Swedish
Interest and inflation rates through the lens of the theory of Irving FisherSveriges Riksbank Economic Review 2015:2 (with Magnus Jonsson)English, Swedish