On the loss function of the Bank of Canada: A note
Based on the approach advanced by Elliott et al. [Elliott, G., Komunjer, I., Timmermann, A., 2005. Estimation and testing of forecast rationality under flexible loss. Review of Economic Studies 72, 1107–1125], we studied whether the inflation and output growth projections published by the Bank of Canada are consistent with an asymmetric loss function. Current-year projections provide no signs of asymmetry, but next-year projections do. The hypothesis of rationality of the projections can be rejected under symmetric loss, but not under asymmetric loss.
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