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Federal Reserve vs. consumer forecasts of inflation: 1979-1983

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  • Hamid Baghestani
  • Mohamed Soliman

Abstract

This article tests the asymmetric information hypothesis using the CPI inflation forecasts of the Federal Reserve and consumers for the volatile inflationary period of 1979-1983. The Fed generally over-predicted inflation, but consumers produced unbiased forecasts with superior predictive content. In fighting inflation, the Fed was, perhaps, cautious by assigning much cost to under-predictions, but little or no cost to over-predictions. Under such an asymmetric loss function, the bias in the Federal Reserve forecast of inflation appears to be rational. However, this explanation, while plausible, cannot be substantiated from the Federal Open Market Committee (FOMC) transcripts.

Suggested Citation

  • Hamid Baghestani & Mohamed Soliman, 2009. "Federal Reserve vs. consumer forecasts of inflation: 1979-1983," Applied Economics Letters, Taylor & Francis Journals, vol. 16(15), pages 1565-1568.
    • Handle: RePEc:taf:apeclt:v:16:y:2009:i:15:p:1565-1568
    DOI: 10.1080/13504850701578835
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    Cited by:

    1. Hamid Baghestani & Barry Poulson, 2012. "Federal Reserve forecasts of nonfarm payroll employment across different political regimes," Journal of Economic Studies, Emerald Group Publishing Limited, vol. 39(3), pages 280-289, July.
    2. Hamid Baghestani & Bassam Abual-Foul, 2010. "Evidence on Forecasting Inflation Under Asymmetric Loss," The American Economist, Sage Publications, vol. 55(1), pages 105-110, May.
    3. Hamid Baghestani & Sehar Fatima, 2021. "Growth in US Durables Spending: Assessing the Impact of Consumer Ability and Willingness to Buy," Journal of Business Cycle Research, Springer;Centre for International Research on Economic Tendency Surveys (CIRET), vol. 17(1), pages 55-69, April.
    4. Young Bin Ahn & Yoichi Tsuchiya, 2016. "Directional analysis of consumers’ forecasts of inflation in a small open economy: evidence from South Korea," Applied Economics, Taylor & Francis Journals, vol. 48(10), pages 854-864, February.
    5. George B. Tawadros, 2013. "The information content of the Reserve Bank of Australia's inflation forecasts," Applied Economics, Taylor & Francis Journals, vol. 45(5), pages 623-628, February.
    6. Lillian R. Gaeto & Sandeep Mazumder, 2019. "Measuring the Accuracy of Federal Reserve Forecasts," Southern Economic Journal, John Wiley & Sons, vol. 85(3), pages 960-984, January.

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