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Evaluating Federal Reserve predictions of growth in consumer spending

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  • Hamid Baghestani

Abstract

This study shows that Federal Reserve forecasts of growth in both total consumption and durable spending are generally rational under asymmetric loss, and the forecasts of growth in nondurable (services) spending, while unbiased (biased), fail to be rational. Yet, these forecasts are all directionally accurate. The forecasts of growth in total consumption, durable and services spending are more (less) accurate in predicting the downward (upward) moves and are thus of value when policymakers assign more (less) cost to incorrect downward (upward) predictions. The forecasts of growth in nondurable spending are equally accurate in predicting the downward and upward moves and are thus of value when policymakers assign similar cost to both incorrect downward and upward predictions. Utilizing survey data to measure the private forecasts, we further provide partial support for the asymmetric information hypothesis that the Federal Reserve has useful information about the state of the economy that is not known by the public.

Suggested Citation

  • Hamid Baghestani, 2013. "Evaluating Federal Reserve predictions of growth in consumer spending," Applied Economics, Taylor & Francis Journals, vol. 45(13), pages 1637-1646, May.
  • Handle: RePEc:taf:applec:45:y:2013:i:13:p:1637-1646
    DOI: 10.1080/00036846.2011.633893
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    File URL: http://hdl.handle.net/10.1080/00036846.2011.633893
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    References listed on IDEAS

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    1. Christopher A. Sims, 2002. "The Role of Models and Probabilities in the Monetary Policy Process," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 33(2), pages 1-62.
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    Cited by:

    1. Chang, Andrew C. & Hanson, Tyler J., 2016. "The accuracy of forecasts prepared for the Federal Open Market Committee," Journal of Economics and Business, Elsevier, vol. 83(C), pages 23-43.

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