A directional analysis of Federal Reserve predictions of growth in unit labor costs and productivity

Hamid Baghestani

International Review of Applied Economics, 2011, vol. 25, issue 3, 303-311

Abstract: Existing evidence suggests that the Federal Reserve forecasts of inflation imply asymmetric loss, as the Fed has significantly over-predicted inflation for the post-Volcker period. Consistent with such evidence, we show that the Federal Reserve forecasts of growth in both unit labor costs and productivity, while directionally accurate for 1983-2003, imply asymmetric loss. That is, the forecasts of growth in unit labor costs are more (less) accurate in predicting the upward (downward) moves. The forecasts of growth in productivity, however, are less (more) accurate in predicting the upward (downward) moves. The interpretation of our findings may be that, in achieving long-term price stability, the Fed is cautious not to incorrectly predict the upward (downward) moves in growth in unit labor costs (productivity).

Keywords: FOMC; Greenbook; inflation; directional accuracy; asymmetric loss (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (9)

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DOI: 10.1080/02692171.2010.495110

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