A Study of Historical Inflation Forecasts Used in the Department of Defense Future Years Defense Program
AIR FORCE INST OF TECH WRIGHT-PATTERSON AFB OH SCHOOL OF LOGISTICS AND ACQUIS ITION MANAGEMENT
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This thesis explores historical inflation forecasts used in the Department of Defense DoD Future Years Defense Program. The study examines historical DoD forecasts against experienced inflation as measured by the Gross National Product and Gross Domestic Product implicit price deflator GNPGDP IPD from 1979 to 1996. This study also compares the accuracy of DoD forecasts with those made by the Congressional Budget Office CBO and Data Resources, Incorporated DRI. The results regarding the performance of historical DoD inflation forecasts are mixed. Upon examining budget through five year GNPGDP IPD forecast spans, DoD short-term results do not indicate a downward bias and DoD long-term results do indicate a downward bias. Overall DoD forecast bias was lower than the CBO and DRI which tended to overestimate inflation. Next, forecast accuracy was evaluated in which all agencies equally anticipated budget year inflation. Forecasts for later years also yielded mixed results. CBO and DRI forecasts tend to exhibit less dispersion, but DoD tends to have less bias. DRI one, two, and three year forecasts and CBO four and five year projections demonstrated the least dispersion while DoD forecast results were more dispersed. Possible explanations and implications of these findings are provided.
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