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Evidence on Forecasting Inflation Under Asymmetric Loss

Hamid Baghestani and Bassam Abual-Foul
Authors registered in the RePEc Author Service: Bassam Abu Al-Foul

The American Economist, 2010, vol. 55, issue 1, 105-110

Abstract: This study extends previous work on the asymmetric information hypothesis by comparing the Federal Reserve and private inflation forecasts in terms of directional accuracy for 1983–2002. In support of this hypothesis, the Federal Reserve forecasts show superiority in terms of both predictive content and directional accuracy. However, both sets of forecasts are far more accurate in predicting upward moves than they are in predicting downward moves. In an environment where maintaining price stability is a top priority, we interpret such evidence as preference for over-prediction under asymmetric loss and argue that the bias in the inflation forecasts is rational.

Keywords: Directional accuracy; Rational bias; Monetary policy; Greenbook; Survey of Professional; Forecasters (search for similar items in EconPapers)
Date: 2010
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DOI: 10.1177/056943451005500111

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