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Asymmetric Loss and the Rationality of Inflation Forecasts: Evidence from South Korea

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  • Young Bin Ahn
  • Yoichi Tsuchiya

Abstract

We examine asymmetry in the loss functions of South Korean consumers' and the Bank of Korea's (BOK) inflation forecasts, and test the rationality of these forecasts under the assumption of a possible asymmetric loss function. Under an asymmetric loss function, we find evidence of asymmetry and support for rationality. We also examine whether the BOK's forecasts incorporate respective forecasts and consensus forecasts efficiently. They broadly use available information efficiently, and their results are robust to inflation‐targeting measures and the recent global financial crisis. However, our results suggest that the information efficiency of the BOK's forecasts for consumers was affected during the period 2007–2008.

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  • Young Bin Ahn & Yoichi Tsuchiya, 2019. "Asymmetric Loss and the Rationality of Inflation Forecasts: Evidence from South Korea," Pacific Economic Review, Wiley Blackwell, vol. 24(4), pages 588-605, October.
    • Handle: RePEc:bla:pacecr:v:24:y:2019:i:4:p:588-605
    DOI: 10.1111/1468-0106.12214
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    Cited by:

    1. Siddhartha S. Bora & Ani L. Katchova & Todd H. Kuethe, 2021. "The Rationality of USDA Forecasts under Multivariate Asymmetric Loss," American Journal of Agricultural Economics, John Wiley & Sons, vol. 103(3), pages 1006-1033, May.
    2. Carola Conces Binder & Rodrigo Sekkel, 2023. "Central Bank Forecasting: A Survey," Staff Working Papers 23-18, Bank of Canada.
    3. Young Bin Ahn & Yoichi Tsuchiya, 2022. "Consumer’s perceived and expected inflation in Japan—irrationality or asymmetric loss?," Empirical Economics, Springer, vol. 63(3), pages 1247-1292, September.

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