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On the accuracy of Federal Reserve forecasts of the saving rate

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  • Hamid Baghestani

Abstract

This study investigates the unbiasedness and efficiency of the Federal Reserve forecasts of the saving rate for two distinct periods. For 1984--1997, when the saving rate was relatively stable, the forecasts are generally unbiased and efficient. For 1998--2007, when the saving rate experienced significant declines, the forecasts are generally biased (over-predicting) but still efficient. Evidence of efficiency or 'weakly' rationality implies that the Federal Reserve forecasts were generated under symmetric (asymmetric) loss for 1984--1997 (1998--2007). Under asymmetric loss where the forecast errors of the same magnitude but of different signs possess different costs, biased forecasts may still be optimal if the bias is strictly due to asymmetric loss. As such, for 1998--2007, the Federal Reserve staff may have assigned high cost (loss) to under-predictions but little or no cost to over-predictions due to, perhaps, perceiving the unusual declines in the saving rate as temporary.

Suggested Citation

  • Hamid Baghestani, 2013. "On the accuracy of Federal Reserve forecasts of the saving rate," Applied Economics Letters, Taylor & Francis Journals, vol. 20(18), pages 1651-1655, December.
  • Handle: RePEc:taf:apeclt:v:20:y:2013:i:18:p:1651-1655
    DOI: 10.1080/13504851.2013.831164
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    File URL: http://hdl.handle.net/10.1080/13504851.2013.831164
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    References listed on IDEAS

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    1. Margaret M. McConnell & Gabriel Perez-Quiros, 2000. "Output fluctuations in the United States: what has changed since the early 1980s?," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
    2. Richard Cohn & Bharat Kolluri, 2003. "Determinants of household saving in the G-7 countries: recent evidence," Applied Economics, Taylor & Francis Journals, vol. 35(10), pages 1199-1208.
    3. 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 447-456, November.
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