The rationality of the OECD foreign-balance forecasts for the U.S.A

A recent study has documented that the OECD forecasts of the U.S.A. foreign balance are biased. This paper, in the spirit of intertemporal models of the current account, advances the hypothesis that the bias is due to the tendency to underpredict the surge in demand which follows peiods of rising consumer indebtedness. The empirical results are consistent with this hypothesis. They also indicate that the bias is more severe than originally thought, but, on the positive side, associated with some easily identifiable periods. Both the theoretical and the empirical analysis should be of interest to economists who study the impact of exchange rate changes on a country’s balance of payments, and to policy makers and market participants who condition their decisions on expectations about future developments.