IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this paper

Heterogenous Forecasting and Federal Reserve Information

Listed author(s):
  • Mordecai Kurz
Registered author(s):

    December 2001 We provide evidence that private forecasters and the staff of the Federal Reserve use different forecasting models to predict inflation and GNP growth and heterogeneity of forecasting models is the norm in the market place. We thus argue that neither the Fed nor commercial forecasters know the "true" model of the economy. We demonstrate that their forecast errors are correlated with information available at the time when the forecasts were made and hence, by studying the systematic patterns of these forecast errors, we can deduce a great deal about their assessments of economic conditions in general and their view of monetary policy in particular. We also show that (i) although all private forecasters have the same information, their diverse forecasting models result in a distribution of forecasts which fluctuates over time. The distribution shows no tendency for convergence. The "consensus" median forecaster is a random member whose identity changes over time; (ii) the evidence shows that at any date there is a whole set of private forecasts who agree with the Fed's forecasts but the Fed forecasts are less volatile than the volatility of private forecasts measured by the variance of the cross-sectional distribution of private forecasts; (iv) diverse assessments of the impact of monetary policy on inflation and growth are important factors which contribute to the heterogeneity of forecasts. A surprising result reveals that although there is strong evidence for heterogeneity among forecasters, we also find similarity in qualitative patterns of forecast errors of all participants, including the Fed. Qualitative similarity implies similarity in the basic ideas underlying the forecasting models even when these ideas are wrong. This implies a degree of correlation among the subjective beliefs of divergent agents in the economy. (v) although all forecasts violate the standard orthogonality conditions of Rational Expectations, we argue in this paper that this should not be interpreted as irrational behavior. We provide an introduction to the theory of Rational Belief (see Kurz (1994), (1997)) and demonstrate that in contrast to the rejection of Rational Expectations, the pattern of estimated parameters is consistent with the predictions of the theory of Rational Beliefs (see Kurz (1994), (1997)). In opposition to some (e.g. De Bondt and Thaler (1985), (1990)), we argue that rejection of rational expectations should not be interpreted to imply irrational behavior. Working Papers Index

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL:
    Download Restriction: no

    Paper provided by Stanford University, Department of Economics in its series Working Papers with number 02002.

    in new window

    Date of creation: Dec 2001
    Handle: RePEc:wop:stanec:02002
    Contact details of provider: Postal:
    Ralph Landau Economics Building, Stanford, CA 94305-6072

    Phone: (650)-725-3266
    Fax: (650)-725-5702
    Web page:

    More information through EDIRC

    No references listed on IDEAS
    You can help add them by filling out this form.

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:wop:stanec:02002. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Thomas Krichel)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.