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Forecast Rationality Tests in the Presence of Instabilities, with Applications to Federal Reserve and Survey Forecasts
Author(s) -
Rossi Barbara,
Sekhposyan Tatevik
Publication year - 2015
Publication title -
journal of applied econometrics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.878
H-Index - 99
eISSN - 1099-1255
pISSN - 0883-7252
DOI - 10.1002/jae.2440
Subject(s) - rationality , econometrics , economics , consensus forecast , survey of professional forecasters , computer science , monetary policy , macroeconomics , political science , law
Summary This paper proposes a framework to implement regression‐based tests of predictive ability in unstable environments, including, in particular, forecast unbiasedness and efficiency tests, commonly referred to as tests of forecast rationality. Our framework is general: it can be applied to model‐based forecasts obtained either with recursive or rolling window estimation schemes, as well as to forecasts that are model free. The proposed tests provide more evidence against forecast rationality than previously found in the Federal Reserve's Greenbook forecasts as well as survey‐based private forecasts. It confirms, however, that the Federal Reserve has additional information about current and future states of the economy relative to market participants. Copyright © 2015 John Wiley & Sons, Ltd.