DP11391 Forecast Rationality Tests in the Presence of Instabilities, With Applications to Federal Reserve and Survey Forecasts

Author(s):	Barbara Rossi, Tatevik Sekhposyan
Publication Date:	July 2016
Keyword(s):	forecast rationality, Forecasting, Greenbook, Monetary policy, real-time data, survey
JEL(s):	C22, C52, C53
Programme Areas:	Monetary Economics and Fluctuations
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=11391

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.