Working Paper

Federal reserve forecasts: asymmetry and state-dependence

Abstract: We jointly test the rationality of the Federal Reserve?s Greenbook forecasts of infiation, unemployment, and output growth using a multivariate nonseparable asymmetric loss function. We find that the forecasts are rationalizable and exhibit directional asymmetry. The degree of asymmetry depends on the phase of the business cycle: The Greenbook forecasts of output growth are too pessimistic in recessions and too optimistic in expansions. The change in monetary policy that occured in the late 1970s has been attributed in the literature to the Fed coming to terms with the difficulties in predicting real variables. Our results offer an alternative explanation: A combination of different preferences over expansions and recessions and less frequent recessions in the latter part of the sample.

Keywords: Forecasting; Rational expectations (Economic theory);

Bibliographic Information

Provider: Federal Reserve Bank of St. Louis

Part of Series: Working Papers

Publication Date: 2013

Number: 2013-012

Related Works

• Working Paper Original (2013) : You are here.
• Working Paper Revision (2017-12-29) : Asymmetry, Complementarities, and State Dependence in Federal Reserve Forecasts