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Source: International Monetary Fund

Optimism Bias in Growth Forecasts—The Role of Planned Policy Adjustments

Author/Editor:

Kareem Ismail ; Roberto Perrelli ; Jessie Yang

Publication Date:

November 8, 2020

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Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary:

Are IMF growth forecasts systematically optimistic? And if so, what is the role of planned policy adjustments on this outcome? Are program forecasts as biased as surveillance forecasts? We try to answer these questions using a comprehensive database on IMF forecasts of economic growth in surveillance and program cases during 2003–2017. We find that large planned fiscal and external adjustments are associated with optimistic growth projections, with significant non-linearities for both program and surveillance cases. Specifically, we find evidence that larger planned fiscal adjustment is associated with higher growth optimism in IMF non-concessional, non-precautionary financial arrangements. Our results show the tendency for optimism has persisted in the period after the Global Financial Crisis. Moreover, the strong correlation between the magnitude of the optimism and expected fiscal consolidation provides a cautionary signal for the post-COVID IMF projections as countries embark on a path of fiscal adjustment.

Series:

Working Paper No. 20/229

Frequency:

regular

English

Publication Date:

November 8, 2020

ISBN/ISSN:

9781513560373/1018-5941

Stock No:

WPIEA2020229

Format:

Paper

Pages:

25

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