Bias in Federal Reserve Inflation Forecasts: Is the Federal Reserve Irrational or Just Cautious?

Carlos Capistrán ()

University of California at San Diego, Economics Working Paper Series from Department of Economics, UC San Diego

Abstract: Inflation forecasts of the Federal Reserve systematically under-predicted inflation before Volcker and systematically over-predicted it afterward. Furthermore, under quadratic loss, commercial forecasts have information not contained in those forecasts. To investigate the cause, this paper recovers the loss function implied by Federal Reserve’s forecasts. It finds that the cost of having inflation above an implicit time-varying target was larger than the cost of having inflation below it for the period since Volcker, and that the opposite was true for the pre-Volcker era. Once these asymmetries are taken into account, the Federal Reserve is found to be rational. (JEL C53, E52)

Keywords: Inflation Forecasts; Asymmetric Loss; Federal Reserve (search for similar items in EconPapers)
Date: 2005-07-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
https://www.escholarship.org/uc/item/6v28v0b6.pdf;origin=repeccitec (application/pdf)

Related works:
Journal Article: Bias in Federal Reserve inflation forecasts: Is the Federal Reserve irrational or just cautious? (2008)
Working Paper: Bias in Federal Reserve Inflation Forecasts: Is the Federal Reserve Irrational or Just Cautious? (2006)
Working Paper: Bias in Federal Reserve Inflation Forecasts: Is the Federal Reserve Irrational or Just Cautious? (2005)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cdl:ucsdec:qt6v28v0b6

Access Statistics for this paper

More papers in University of California at San Diego, Economics Working Paper Series from Department of Economics, UC San Diego Contact information at EDIRC.
Bibliographic data for series maintained by Lisa Schiff ().