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Using forecasts to uncover the loss function of FOMC members

Author

Listed:
  • Christian Pierdzioch

    () (University of Hamburg)

  • Jan-Christoph Rülke

    () (University of Vallendar)

  • Peter Tillmann

    () (University of Giessen)

Abstract

We revisit the sources of the bias in Federal Reserve forecasts and assess whether a precautionary motive can explain the forecast bias. In contrast to the existing literature, we use forecasts submitted by individual FOMC members to uncover members' implicit loss function. Our key finding is that the loss function of FOMC members is asymmetric: FOMC members incur a higher loss when they underpredict (overpredict) inflation and unemployment (real GDP) as compared to an overprediction (underprediction) of similar size. Our findings add to the recent controversy on the relative quality of FOMC forecasts compared to staff forecasts. Together with Capistran's (2008) finding of similar asymmetries in Federal Reserve staff forecasts our results suggest that differences in predictive ability do not stem from differences in preferences. This is underlined by our second result: forecasts remain biased even after accepting an asymmetric loss function.

Suggested Citation

  • Christian Pierdzioch & Jan-Christoph Rülke & Peter Tillmann, 2013. "Using forecasts to uncover the loss function of FOMC members," MAGKS Papers on Economics 201302, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
  • Handle: RePEc:mar:magkse:201302
    as

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    File URL: https://www.uni-marburg.de/fb02/makro/forschung/magkspapers/02-2013_tillmann.pdf
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    References listed on IDEAS

    as
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    Citations

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    Cited by:

    1. El-Shagi, Makram & Jung, Alexander, 2015. "Does the Greenspan era provide evidence on leadership in the FOMC?," Journal of Macroeconomics, Elsevier, vol. 43(C), pages 173-190.
    2. Sheng, Xuguang (Simon), 2015. "Evaluating the economic forecasts of FOMC members," International Journal of Forecasting, Elsevier, vol. 31(1), pages 165-175.

    More about this item

    Keywords

    Federal Open Market Committee; forecasting; asymmetric loss function; monetary policy;

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications

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