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Federal reserve forecasts: asymmetry and state-dependence

  • Julieta Caunedo
  • Riccardo DiCecio
  • Ivana Komunjer
  • Michael T. Owyang

We jointly test the rationality of the Federal Reserve’s Greenbook forecasts of infiation, unemployment, and output growth using a multivariate nonseparable asymmetric loss function. We find that the forecasts are rationalizable and exhibit directional asymmetry. The degree of asymmetry depends on the phase of the business cycle: The Greenbook forecasts of output growth are too pessimistic in recessions and too optimistic in expansions. The change in monetary policy that occured in the late 1970s has been attributed in the literature to the Fed coming to terms with the difficulties in predicting real variables. Our results offer an alternative explanation: A combination of different preferences over expansions and recessions and less frequent recessions in the latter part of the sample.

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Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2013-012.

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Date of creation: 2013
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Handle: RePEc:fip:fedlwp:2013-012
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