2/2020 Natalia Levenko. Elevated survey uncertainty after the Great Recession: a non-linear approach
Working Papers of Eesti Pank 2/2020
The European Survey of Professional Forecasters (SPF) is a dataset that is widely used to derive measures of forecast uncertainty. Participants in the SPF provide not only point estimates but also density forecasts for key macroeconomic variables. The mean individual variance, defined as the average of the variances of individual forecasts, shifted up during the Great Recession and has remained elevated since the crisis. This shift is not typical since proxies for uncertainty are usually counter-cyclical. The paper seeks to explain this puzzling lack of countercyclicality by applying a smooth transition analysis on data from the European SPF. The analysis indicates that the mean individual variance has a non-linear relationship with the share of non-rounded responses in the survey and consequently the upward shift in individual variance is likely to be associated with changes in the modelling preferences of forecasters. The results remain robust after potential endogeneity has been accounted for.
JEL Codes: C25, C32, C83, D81, E32, E37
Keywords: survey uncertainty; forecast disagreement; density forecasts; surveys of professional forecasters; Great Recession; smooth transition; instrumental variables
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