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A directional analysis of Federal Reserve predictions of growth in unit labor costs and productivity

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  • Hamid Baghestani

Abstract

Existing evidence suggests that the Federal Reserve forecasts of inflation imply asymmetric loss, as the Fed has significantly over-predicted inflation for the post-Volcker period. Consistent with such evidence, we show that the Federal Reserve forecasts of growth in both unit labor costs and productivity, while directionally accurate for 1983-2003, imply asymmetric loss. That is, the forecasts of growth in unit labor costs are more (less) accurate in predicting the upward (downward) moves. The forecasts of growth in productivity, however, are less (more) accurate in predicting the upward (downward) moves. The interpretation of our findings may be that, in achieving long-term price stability, the Fed is cautious not to incorrectly predict the upward (downward) moves in growth in unit labor costs (productivity).

Suggested Citation

  • Hamid Baghestani, 2011. "A directional analysis of Federal Reserve predictions of growth in unit labor costs and productivity," International Review of Applied Economics, Taylor & Francis Journals, vol. 25(3), pages 303-311.
  • Handle: RePEc:taf:irapec:v:25:y:2011:i:3:p:303-311
    DOI: 10.1080/02692171.2010.495110
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    Cited by:

    1. Yoichi Tsuchiya, 2012. "Is the Purchasing Managers' Index useful for assessing the economy's strength? A directional analysis," Economics Bulletin, AccessEcon, vol. 32(2), pages 1302-1311.
    2. Tsuchiya, Yoichi, 2014. "Purchasing and supply managers provide early clues on the direction of the US economy: An application of a new market-timing test," International Review of Economics & Finance, Elsevier, vol. 29(C), pages 599-618.

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