Testing bias in professional forecasts

Professional forecasters can rely on econometric models, on their personal expertise or on both. To accommodate for adjustments to model forecasts, this paper proposes to use two stage least squares (TSLS) (and not ordinary least squares [OLS]) for the familiar Mincer–Zarnowitz regression when examining bias in professional forecasts, where the instrumental variable is the consensus forecast. An illustration for 15 professional forecasters with their quotes for real gross domestic product (GDP) growth, inflation and unemployment for the United States documents the usefulness of this new estimation method. It also shows that TSLS suggests less bias than OLS does.