On the accuracy of Federal Reserve forecasts of the saving rate

Hamid Baghestani

Applied Economics Letters, 2013, vol. 20, issue 18, 1651-1655

Abstract: This study investigates the unbiasedness and efficiency of the Federal Reserve forecasts of the saving rate for two distinct periods. For 1984--1997, when the saving rate was relatively stable, the forecasts are generally unbiased and efficient. For 1998--2007, when the saving rate experienced significant declines, the forecasts are generally biased (over-predicting) but still efficient. Evidence of efficiency or 'weakly' rationality implies that the Federal Reserve forecasts were generated under symmetric (asymmetric) loss for 1984--1997 (1998--2007). Under asymmetric loss where the forecast errors of the same magnitude but of different signs possess different costs, biased forecasts may still be optimal if the bias is strictly due to asymmetric loss. As such, for 1998--2007, the Federal Reserve staff may have assigned high cost (loss) to under-predictions but little or no cost to over-predictions due to, perhaps, perceiving the unusual declines in the saving rate as temporary.

Date: 2013
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DOI: 10.1080/13504851.2013.831164

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