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Oil prices assumptions in macroeconomic forecasts: should we follow futures market expectations?
E17 - Forecasting and Simulation
Q43 - Energy and the Macroeconomy
In macroeconomic forecasting, in spite of its important role in prices and activity developments, oil prices are usually taken as an exogenous variable for which assumptions have to be made. This paper evaluates the forecasting performance of futures markets prices against other popular technical procedure, the carry-over assumption. The results suggest that it is almost indifferent to opt for the futures market prices or the carry over assumption for short-term forecasting horizons (up to 12 months), while, for longer-term horizons, they favour the use of futures market prices. However, as futures markets prices reflect the markets expectations for the world economic activity, futures oil prices should be adjusted whenever the market expectations for the world economic growth are different from the values underlying the macroeconomic scenarios in order to assure fully internal consistency of those scenarios.