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Are economic forecasts rational?

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Author Info

  • Michael P. Keane
  • David E. Runkle

Abstract

This paper discusses at an undergraduate level how forecast rationality can be tested. It explains that forecasters should correctly use any relevant information they knew in making their predictions. It shows that forecast rationality can be tested by determining whether the forecasters' prediction errors are predictable. After addressing what data and methods can be used for testing rationality, the paper presents tests of the price-forecast rationality of individual professional forecasters. Unlike results of previous studies, the test results show that those forecasters' price predictions appear to be rational.

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Bibliographic Info

Article provided by Federal Reserve Bank of Minneapolis in its journal Quarterly Review.

Volume (Year): (1989)
Issue (Month): Spr ()
Pages: 26-33

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Handle: RePEc:fip:fedmqr:y:1989:i:spr:p:26-33:n:v.13no.2

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Related research

Keywords: Forecasting ; Rational expectations (Economic theory);

References

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  1. Figlewski, Stephen & Wachtel, Paul, 1981. "The Formation of Inflationary Expectations," The Review of Economics and Statistics, MIT Press, vol. 63(1), pages 1-10, February.
  2. Keane, Michael P & Runkle, David E, 1990. "Testing the Rationality of Price Forecasts: New Evidence from Panel Data," American Economic Review, American Economic Association, vol. 80(4), pages 714-35, September.
  3. Brown, Bryan W & Maital, Shlomo, 1981. "What Do Economists Know? An Empirical Study of Experts' Expectations," Econometrica, Econometric Society, vol. 49(2), pages 491-504, March.
  4. Gramlich, Edward M, 1983. "Models of Inflation Expectations Formation: A Comparison of Household and Economist Forecasts," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 15(2), pages 155-73, May.
  5. Lovell, Michael C, 1986. "Tests of the Rational Expectations Hypothesis," American Economic Review, American Economic Association, vol. 76(1), pages 110-24, March.
  6. Thomas J. Sargent & Neil Wallace, 1974. "Rational expectations and the theory of economic policy," Working Papers 29, Federal Reserve Bank of Minneapolis.
  7. Mullineaux, Donald J, 1978. "On Testing for Rationality: Another Look at the Livingston Price Expectations Data," Journal of Political Economy, University of Chicago Press, vol. 86(2), pages 329-36, April.
  8. John A. Carlson, 1977. "A Study of Price Forecasts," NBER Chapters, in: Annals of Economic and Social Measurement, Volume 6, number 1, pages 27-56 National Bureau of Economic Research, Inc.
  9. Pesando, James E, 1975. "A Note on the Rationality of the Livingston Price Expectations," Journal of Political Economy, University of Chicago Press, vol. 83(4), pages 849-58, August.
  10. Cukierman, Alex, 1986. "Measuring inflationary expectations: A review essay," Journal of Monetary Economics, Elsevier, vol. 17(2), pages 315-324, March.
  11. Pearce, Douglas K, 1979. "Comparing Survey and Rational Measures of Expected Inflation: Forecast Performance and Interest Rate Effects," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(4), pages 447-56, November.
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Citations

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Cited by:
  1. Yash P. Mehra, 2002. "Survey measures of expected inflation : revisiting the issues of predictive content and rationality," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 17-36.
  2. James M. Hvidding, 1991. "Do Households Misperceive the Price Level? Some Evidence from Survey Data," Eastern Economic Journal, Eastern Economic Association, vol. 17(1), pages 72-74, Jan-Mar.
  3. Corradi, Valentina & Fernandez, Andres & Swanson, Norman R., 2009. "Information in the Revision Process of Real-Time Datasets," Journal of Business & Economic Statistics, American Statistical Association, vol. 27(4), pages 455-467.
  4. Wong, Shirly Siew-Ling & Puah, Chin-Hong & Shazali, Abu Mansor, 2011. "Survey Evidence on the Rationality of Business Expectations: Implications from the Malaysian Agricultural Sector," MPRA Paper 36661, University Library of Munich, Germany.
  5. David E. Runkle, 1989. "The U.S. economy in 1990 and 1991: continued expansion likely," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 19-26.
  6. David E. Runkle, 1990. "Bad news from a forecasting model of the U.S. economy," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 2-10.
  7. Puah, Chin-Hong & Wong, Shirly Siew-Ling & Habibullah, Muzafar Shah, 2012. "Rationality of business operational forecasts: evidence from Malaysian distributive trade sector," MPRA Paper 37599, University Library of Munich, Germany.

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