The rationality of price forecasts: a directional analysis

Tests of direction are used to evaluate the rationality and uselfulness of the price (GDP implicit deflator) forecasts made by the International Monetary Fund (IMF) for the G7 countries. Two procedures are employed to determine whether that price forecasts could be useful to users. This tests are based on Merton's (1981) and Henriksson and Merton's (1981) method for determining the conditions under which a market-timing forecast is useful to investors. The results indicate that year ahead forecasts are less good than near term forecasts, because there is no evidence that longer term price forecasts are valuable for the United States, Japan, France, Italy and Canada.

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