Forecast Performance in Times of Terrorism∗
Forecast Performance in Times of Terrorism Jonathan Benchimoly and Makram El-Shagiz September 8, 2020 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, a factor that should be consid- ered by decision-makers. We focus on terrorism as a mostly endogenously driven form of political uncertainty and assess the forecasting performance of market-based and professional inflation and exchange rate forecasts in Israel. We show that expert forecasts are better than market-based fore- casts, particularly during periods of terrorism. However, the performance of both market-based and expert forecasts is significantly worse during such periods. Thus, policymakers should be particularly attentive to terrorism when considering inflation and exchange rate forecasts. Keywords: inflation, exchange rate, forecast performance, terrorism, market forecast, expert forecast. JEL Classification: C53, E37, F37, F51. Please cite this paper as: Benchimol, J., and El-Shagi, M., 2020. Forecast performance in times terrorism. Economic Modelling, 91, 386-402. This paper does not necessarily reflect the views of the Bank of Israel. The authors thank the associate editor, Joakim Westerlund, the anonymous referees, Itamar Caspi, Wagner Piazza Gaglianone, Dan Galai, Eleonora Granziera, Rudy Malka, Ariel Mansura, Benzion Schreiber, Yoav Soffer, Michel Strawczynski, Harald Uhlig, Noam Zussman, and participants at the 34th Israel Economic Association, 49th Money, Macro and Finance Research Group, and 34th CIRET annual conferences, as well as participants of the Romanian Academy, University of Macau and Bank of Israel’sresearch seminars for their useful comments. yBank of Israel, Jerusalem, Israel.
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