Multivariate asymmetric loss functions of the European Central Bank

Yoichi Tsuchiya

Applied Economics Letters, 2021, vol. 28, issue 12, 1026-1030

Abstract: This study investigates asymmetric loss functions in the forecasts of real output growth and inflation published by the European Central Bank (ECB). In contrast to previous studies that examined each variable independently, this study evaluates the ECB forecasts in a multivariate framework, which accommodates the interaction of forecast errors of different forecast variables. The empirical results indicate that ECB is likely to produce under-predicted real output growth and over-predicted inflation forecasts for the current year. For the next-year forecast, ECB produces unbiased inflation forecast by applying multivariate framework, while the forecast of real output growth is over-predicted. Those forecasts are rational under multivariate asymmetric loss functions. Our results suggest that ECB attempts to maintain its credibility by providing unbiased inflation forecasts, and thus, puts first priority on price stabilization for medium term.

Date: 2021
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DOI: 10.1080/13504851.2020.1795067

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