December 10th, 2017
Our first Discussion Paper 2017/1 is now available: Benchimol, Jonathan / El-Shagi, Makram: Forecast Performance in Times of Terrorism
Abstract: Governments, central banks, and private companies make extensive use of expert and market-based forecasts in their decision-making processes. These forecasts can be affected by terrorism, which should be considered by decision makers. We focus on terrorism, as a mostly endogenously driven form of political uncertainty, and use new econometric tests to assess the forecasting performance of market and professional inflation and exchange-rate forecasts in Israel. We show that expert forecasts are better than market-based forecasts, particularly during periods of terrorism. However, forecasting performance and abilities of both market-based and expert forecasts are signifi cantly reduced during such periods. Thus, policymakers should be particularly attentive to terrorism when considering inflation and exchange-rate forecasts.