The Curse of Irving Fisher (Professional Forecasters' Version). (with James Yetman, November 2007)
Dynamic Euler equations restrict multivariate forecasts, so we can estimate their parameters using the predictions of
professional forecasters. We illustrate this novel way of testing theory with an application to the CCAPM. By using forecast data for
both returns and fundamentals, we use a complete cross-section of forecasts, and not just the median. For quarterly US data since 1981
this approach gives us 14727 observations, as opposed to the 107 quarterly observations on realized data. The resulting precision
reduces standard errors by a factor of 10, and finds a negative relationship between consumption growth and the real interest rate.
Consumption and Real Exchange Rates in Professional Forecasts. (with Michael B. Devereux and James Yetman, January 2009).
Most models of international risk sharing with complete asset markets predict a positive
association between relative consumption growth and real currency depreciation rates
across countries. The striking lack of evidence for this link — the consumption/real
exchange-rate anomaly or Backus-Smith puzzle — has prompted research on risk-sharing
indicators with incomplete asset markets. That research generally implies that the association
holds in forecasts, rather than realizations. But using professional forecasts for 28
countries for 1990-2008 we find no such association, thus deepening the puzzle
Discussion of Barnett, Kozicki, and Petrinec's
Parsing shocks: real-time revisions to gap and growth projections for Canada,
at the 33rd annual Economic Policy Conference, Federal Reserve Bank of St. Louis, October 2008.
