Biases in Macroeconomic Forecasts: Irrationality or Asymmetric Loss?

Allan Timmermann (), Graham Elliott () and Ivana Komunjer

No 601, Econometric Society 2004 North American Summer Meetings from Econometric Society

Abstract: Survey data on expectations frequently find evidence that forecasts are biased, rejecting the joint hypothesis of rational expectations and symmetric loss. While the literature has attempted to explain this bias through forecasters' strategic behavior, we propose a simpler explanation based on asymmetric loss. We establish that existing rationality tests are not robust to even small deviations from symmetry and hence have little ability to tell whether the forecaster is irrational or the loss function is asymmetric. We propose new and more general methods for testing forecast rationality jointly with flexible families of loss functions that embed quadratic loss as a special case. An empirical application to survey data on forecasts of nominal output growth shows strong evidence against rationality and symmetric loss. There is considerably weaker evidence against rationality once asymmetric loss is permitted

Keywords: rationality testing; forecasting; asymmetric loss (search for similar items in EconPapers)
JEL-codes: C53 E27 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ets and nep-mac
Date: 2004-08-11
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Related works:
Working Paper: BIASES IN MACROECONOMIC FORECASTS: IRRATIONALITY OR ASYMMETRIC LOSS? (2005)
Journal Article: Biases in Macroeconomic Forecasts: Irrationality or Asymmetric Loss? (2008)
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Persistent link: http://EconPapers.repec.org/RePEc:ecm:nasm04:601

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