Testing for the rationality of central bank interest rate forecasts

Michael Frenkel (), Jin-Kyu Jung () and Jan-Christoph Rülke ()
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Michael Frenkel: WHU – Otto Beisheim School of Management
Jin-Kyu Jung: WHU – Otto Beisheim School of Management
Jan-Christoph Rülke: EBS – Universität für Wirtschaft und Recht

Empirical Economics, 2022, vol. 62, issue 3, No 5, 1037-1078

Abstract: Abstract In this paper, we study the bias in interest rate projections of five central banks, namely the central banks of the Czech Republic, New Zealand, Norway, Sweden, and the USA. We examine whether central bank projections are based on an asymmetric loss function and report evidence that central banks perceive an overprojection of their longer-term interest rate forecasts as twice as costly as an underprojection of the same size. We find that forecast rationality is consistent with biased interest rate projections under the assumption of an asymmetric loss function, which contributes to explaining the behavior of the examined central banks and their forecasts.

Keywords: Asymmetric loss; Forecast rationality; Interest rate forecasts (search for similar items in EconPapers)
JEL-codes: E43 E47 E58 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1007/s00181-021-02046-y

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