Working Paper Revision

Asymmetry, Complementarities, and State Dependence in Federal Reserve Forecasts

Abstract: Forecasts are a central component of policy making; the Federal Reserve''s forecasts are published in a document called the Greenbook. Previous studies of the Greenbook''s inflation forecasts have found them to be rationalizable but asymmetric if considering particular sub-periods, e.g., before and after the Volcker appointment. In these papers, forecasts are analyzed in isolation, assuming policymakers value them independently. We analyze the Greenbook fore- casts in a framework in which the forecast errors are allowed to interact. We find that allowing the losses to interact makes the unemployment forecasts virtually symmetric, the output forecasts symmetric prior to the Volcker appointment, and the inflation forecasts symmetric after the onset of the Great Moderation.

Keywords: economic research; forecast rationality; loss function; Taylor rule; Greenbook forecasts; break tests;

JEL Classification: C32; E32;

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Bibliographic Information

Provider: Federal Reserve Bank of St. Louis

Part of Series: Working Papers

Publication Date: 2017-12-29

Number: 2013-012

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