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Rational bias in macroeconomic forecasts

  • David Laster
  • Paul Bennett
  • In Sun Geoum
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    This paper develops a model of macroeconomic forecasting in which a forecaster's wage is a function of his accuracy as well as the publicity he generates for his firm by being correct. In the resulting Nash equilibrium, forecasters with identical models, information, and incentives nevertheless produce a variety of predictions, consciously biasing them in order to maximize expected wages. In the case of heterogeneous incentives, the forecasters whose wages are most closely tied to publicity, as opposed to accuracy, produce the forecasts that deviate most from the consensus. We find empirical support for our model using a twenty-year panel of real GNP/GDP forecast data from Blue Chip Economic Indicators. Although the consensus outperforms virtually every forecaster, many forecasters choose to deviate from it substantially and regularly. Moreover, the extent of this deviation varies by industry in a manner consistent with our model.

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    File URL: http://www.newyorkfed.org/research/staff_reports/research_papers/9617.html
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    File URL: http://www.newyorkfed.org/research/staff_reports/research_papers/9617.pdf
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    Paper provided by Federal Reserve Bank of New York in its series Research Paper with number 9617.

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    Date of creation: 1996
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    Handle: RePEc:fip:fednrp:9617
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    1. Scharfstein, David S & Stein, Jeremy C, 1990. "Herd Behavior and Investment," American Economic Review, American Economic Association, vol. 80(3), pages 465-79, June.
    2. Jeong, Jinook & Maddala, G S, 1996. "Testing the Rationality of Survey Data Using the Weighted Double-Bootstrapped Method of Moments," The Review of Economics and Statistics, MIT Press, vol. 78(2), pages 296-302, May.
    3. Keane, Michael P & Runkle, David E, 1990. "Testing the Rationality of Price Forecasts: New Evidence from Panel Data," American Economic Review, American Economic Association, vol. 80(4), pages 714-35, September.
    4. Rosen, Sherwin, 1981. "The Economics of Superstars," American Economic Review, American Economic Association, vol. 71(5), pages 845-58, December.
    5. Francis X. Diebold & Jose A. Lopez, 1995. "Forecast evaluation and combination," Research Paper 9525, Federal Reserve Bank of New York.
    6. Stephen K. McNees, 1992. "How large are economic forecast errors?," New England Economic Review, Federal Reserve Bank of Boston, issue Jul, pages 25-42.
    7. Takatoshi Ito, 1988. "Foreign Exchange Rate Expectations: Micro Survey Data," NBER Working Papers 2679, National Bureau of Economic Research, Inc.
    8. Lamont, Owen A., 2002. "Macroeconomic forecasts and microeconomic forecasters," Journal of Economic Behavior & Organization, Elsevier, vol. 48(3), pages 265-280, July.
    9. Keane, Michael & Runkle, David E, 1995. "Testing the Rationality of Price Forecasts: Reply," American Economic Review, American Economic Association, vol. 85(1), pages 290, March.
    10. McNees, Stephen K, 1978. "The "Rationality" of Economic Forecasts," American Economic Review, American Economic Association, vol. 68(2), pages 301-05, May.
    11. McNees, Stephen K., 1989. "Forecasts and actuals: The trade-off between timeliness and accuracy," International Journal of Forecasting, Elsevier, vol. 5(3), pages 409-416.
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