Using forecasts to uncover the loss function of FOMC members

Christian Pierdzioch, Jan-Christoph Rülke () and Peter Tillmann
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Jan-Christoph Rülke: University of Vallendar

MAGKS Papers on Economics from Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung)

Abstract: We revisit the sources of the bias in Federal Reserve forecasts and assess whether a precautionary motive can explain the forecast bias. In contrast to the existing literature, we use forecasts submitted by individual FOMC members to uncover members' implicit loss function. Our key finding is that the loss function of FOMC members is asymmetric: FOMC members incur a higher loss when they underpredict (overpredict) inflation and unemployment (real GDP) as compared to an overprediction (underprediction) of similar size. Our findings add to the recent controversy on the relative quality of FOMC forecasts compared to staff forecasts. Together with Capistran's (2008) finding of similar asymmetries in Federal Reserve staff forecasts our results suggest that differences in predictive ability do not stem from differences in preferences. This is underlined by our second result: forecasts remain biased even after accepting an asymmetric loss function.

Keywords: Federal Open Market Committee; forecasting; asymmetric loss function; monetary policy (search for similar items in EconPapers)
JEL-codes: E27 E37 E58 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2013
New Economics Papers: this item is included in nep-for, nep-mac and nep-mon
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:mar:magkse:201302

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