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Discussion Paper Details

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Title: Forecast Rationality Tests in the Presence of Instabilities, With Applications to Federal Reserve and Survey Forecasts

Author(s): Barbara Rossi and Tatevik Sekhposyan

Publication Date: July 2016

Keyword(s): forecast rationality, Forecasting, Greenbook, Monetary policy, real-time data and survey

Programme Area(s): Monetary Economics and Fluctuations

Abstract: This paper proposes a framework to implement regression-based tests of predictive ability in unstable environments, including, in particular, forecast unbiasedness and efficiency tests, commonly referred to as tests of forecast rationality. Our framework is general: it can be applied to model-based forecasts obtained either with recursive or rolling window estimation schemes, as well as to forecasts that are model-free. The proposed tests provide more evidence against forecast rationality than previously found in the Federal Reserve's Greenbook forecasts as well as survey-based private forecasts. It confirms, however, that the Federal Reserve has additional information about current and future states of the economy relative to market participants.

For full details and related downloads, please visit: https://cepr.org/active/publications/discussion_papers/dp.php?dpno=11391

Bibliographic Reference

Rossi, B and Sekhposyan, T. 2016. 'Forecast Rationality Tests in the Presence of Instabilities, With Applications to Federal Reserve and Survey Forecasts'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=11391