Abstract:We analyze the causes of the apparent bias toward optimism in growth forecasts underpinning the design of IMF-supported programs, which has been documented in the literature. We find that financial variables observable to forecasters are strong predictors of growth forecast errors. The greater the expansion of the credit-to-GDP gap in the years preceding a forecast, the greater its over-optimism about growth over the next two years. This result is strongest among forecasts that were most optimistic, where erro… Show more
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