Directional forecasts of GDP and inflation: a joint evaluation with an application to Federal Reserve predictions

Abstract

Many studies have undertaken separate analyses of the Fed's forecasts of real Gross Domestic Product (GDP) growth and inflation. This article presents a method for jointly evaluating the direction of change predictions of these variables. We conclude that some of the inflation forecasts, examined separately, were not valuable. However, the joint pattern of GDP and inflation projections was generally in accord with the economy's movements. ‘… directional forecasting … is now an increasingly popular metric for forecasting performance….’ (Pesaran and Timmermann, 2004 Pesaran, MH and Timmermann, A. 2004. How costly is it to ignore breaks when forecasting the direction of a time series?. International Journal of Forecasting, 20: 411–25. [Crossref], [Web of Science ®] , [Google Scholar], 414)