Document Type

Honors Project

Abstract

In this paper, I examine why forecasters inaccurately predict the annual growth rate of real GDP in late 1990s (the dot com boom) and early 21st century. I argue that forecasters herd around the lagged consensus (the mean forecast) which, when uninformative, leads them to converge to the wrong prediction. Using data from the Blue Chip Economic Indicators newsletter and the Real Time Research Center at the Federal Reserve Bank of Philadelphia for the 1994-2002 period, I econometrically test for the presence of herding and its impact on accuracy. The results suggest that (1) forecasters do herd to “the wisdom of the crowd”, (2) forecaster herding propensities and forecaster accuracy vary from year to year (3) greater forecaster herding leads to greater inaccuracy during the “new economy boom” of the late 1990s.

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Economics Commons

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