Federal Reserve vs. consumer forecasts of inflation: 1979-1983

Hamid Baghestani and Mohamed Soliman

Applied Economics Letters, 2009, vol. 16, issue 15, 1565-1568

Abstract: This article tests the asymmetric information hypothesis using the CPI inflation forecasts of the Federal Reserve and consumers for the volatile inflationary period of 1979-1983. The Fed generally over-predicted inflation, but consumers produced unbiased forecasts with superior predictive content. In fighting inflation, the Fed was, perhaps, cautious by assigning much cost to under-predictions, but little or no cost to over-predictions. Under such an asymmetric loss function, the bias in the Federal Reserve forecast of inflation appears to be rational. However, this explanation, while plausible, cannot be substantiated from the Federal Open Market Committee (FOMC) transcripts.

Date: 2009
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DOI: 10.1080/13504850701578835

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