Do Measurement Errors in GDP Announcements Cause Output Fluctuations?

This thesis studies empirically whether measurement errors in aggregate production statistics affect sentiment and future output. Initial announcements of aggregate production are subject to measurement error, because many of the data required to compile the statistics are produced with a lag. This measurement error can be gauged as the difference between the latest revised statistic and its initial announcement. Assuming aggregate production statistics help forecast future aggregate production, these measurement errors are expected to affect macroeconomic forecasts. Assuming agents’ macroeconomic forecasts affect their production choices, these measurement errors should affect future output through sentiment. This thesis is primarily empirical, so the theoretical basis, strategic complementarity, is discussed quite briefly. However, it is a model in which higher aggregate production increases each agent’s incentive to produce. In this circumstance a statistical announcement which suggests aggregate production is high would increase each agent’s incentive to produce, thus resulting in higher aggregate production. In this way the existence of strategic complementarity provides the theoretical basis for output fluctuations caused by measurement mistakes in aggregate production statistics. Previous empirical studies suggest that measurement errors in gross national product affect future aggregate production in the United States. Additionally it has been demonstrated that measurement errors in the Index of Leading Indicators affect forecasts by professional economists as well as future industrial production in the United States. This thesis aims to verify the applicability of these findings to other countries, as well as study the link between measurement errors in gross domestic product and sentiment. This thesis explores the relationship between measurement errors in gross domestic production and sentiment and future output. Professional forecasts and consumer sentiment in the United States and Finland, as well as producer sentiment in Finland, are used as the measures of sentiment. Using statistical techniques it is found that measurement errors in gross domestic product affect forecasts and producer sentiment. The effect on consumer sentiment is ambiguous. The relationship between measurement errors and future output is explored using data from Finland, United States, United Kingdom, New Zealand and Sweden. It is found that measurement errors have affected aggregate production or investment in Finland, United States, United Kingdom and Sweden. Specifically, it was found that overly optimistic statistics announcements are associated with higher output and vice versa.