German business cycle forecasts, asymmetric loss and financial variables

We examine the efficiency of German forecasts for output growth and inflation allowing for an asymmetric loss function of the forecasters. We find the loss of output growth forecasts to be approximately symmetric while there is an asymmetry in the loss of the inflation forecasts. The information of financial variables seems to be adequately incorporated into the output forecasts but to a lesser extent into the inflation forecasts.     

Rationality of inflation–output forecasts of MMS survey: international evidence

We analyse the individual rationality of inflation and output forecasts from Money Market Survey (MMS) for a group of G7 countries and EU under asymmetric univariate Linlin and Linex loss functions. We also test for joint rationality of inflation–output forecasts using the forecast rationality test under multivariate asymmetric loss functions proposed by Ulu (2013). Our results indicate that rationality is often rejected under symmetric loss, and results improve towards rationality when asymmetric loss functions are assumed. The assumption of multivariate asymmetric loss compared to univariate asymmetric loss provides further evidence towards rationality. We also analyse directional forecast accuracy of the inflation and output forecasts and find that the inflation–output forecasts of MMS are valuable when considered both jointly and separately.     

Estimation and Testing of Forecast Rationality under Flexible Loss

In situations where a sequence of forecasts is observed, a common strategy is to examine „rationality” conditional on a given loss function. We examine this from a different perspective—supposing that we have a family of loss functions indexed by unknown shape parameters, then given the forecasts can we back out the loss function parameters consistent with the forecasts being rational even when we do not observe the underlying forecasting model? We establish identification of the parameters of a general class of loss functions that nest popular loss functions as special cases and provide estimation methods and asymptotic distributional results for these parameters. This allows us to construct new tests of forecast rationality that allow for asymmetric loss. The methods are applied in an empirical analysis of IMF and OECD forecasts of budget deficits for the G7 countries. We find that allowing for asymmetric loss can significantly change the outcome of empirical tests of forecast rationality.     

Asymmetric loss and herding behaviour of exchange rate forecasters: evidence from South Africa

This study examines the asymmetry of the loss function for private forecasters in exchange rate forecasts of the South African rand. It tests rationality under the possibility of an asymmetric loss function. The results indicate less evidence of asymmetry for a horizon of 1 month but considerable evidence of asymmetry for a horizon of 3 months. However, the shapes of the distributions formed by estimated asymmetry parameters of sub-samples for each forecaster are symmetric, regardless of the forecast horizons, which implies that these forecasters do not herd or antiherd. In fact, the results of our empirical herding test show that forecasters neither herd nor antiherd, which is in sharp contrast to recent findings on antiherding for foreign exchange rates in emerging market economies. Our findings provide consistent evidence for a recent suggestion that antiherding might result in the rejection of rationality, even under asymmetric loss functions. Our findings also suggest that central bank transparency might be associated with herding behaviours.     

On the loss function of the Bank of Canada: A note

Based on the approach advanced by Elliott et al. [Elliott, G., Komunjer, I., Timmermann, A., 2005. Estimation and testing of forecast rationality under flexible loss. Review of Economic Studies 72, 1107-1125], we studied whether the inflation and output growth projections published by the Bank of Canada are consistent with an asymmetric loss function. Current-year projections provide no signs of asymmetry, but next-year projections do. The hypothesis of rationality of the projections can be rejected under symmetric loss, but not under asymmetric loss.     

State dependent asymmetric loss and the consensus forecast of real U.S. GDP growth

It has been well documented that the consensus forecast from surveys of professional forecasters shows a bias that varies over time. In this paper, we examine whether this bias may be due to forecasters having an asymmetric loss function. In contrast to previous research, we account for the time variation in the bias by making the loss function depend on the state of the economy. The asymmetry parameter in the loss function is specified to depend on set state variables which may cause forecaster to intentionally bias their forecasts. We consider both the Lin–Ex and asymmetric power loss functions. For the commonly used Lin–Ex and Lin–Lin loss functions, we show the model can be easily estimated by least squares. We apply our methodology to the consensus forecast of real U.S. GDP growth from the Survey of Professional Forecasters. We find that forecast uncertainty has an asymmetric effect on the asymmetry parameter in the loss function dependent upon whether the economy is in expansion or contraction. When the economy is in expansion, forecaster uncertainty is related to an overprediction in the median forecast of real GDP growth. In contrast, when the economy is in contraction, forecaster uncertainty is related to an underprediction in the median forecast of real GDP growth. Our results are robust to the particular loss function that is employed in the analysis.     

An analysis of the informational content of New Zealand data releases: The importance of business opinion surveys

We examine the informational content of New Zealand data releases using a parametric dynamic factor model estimated with unbalanced real-time panels of quarterly data. The data are categorised into 21 different release blocks, allowing us to make 21 different factor model forecasts each quarter. We compare three of these factor model forecasts for real GDP growth, CPI inflation, non-tradable CPI inflation, and tradable CPI inflation with three different real-time forecasts made by the Reserve Bank of New Zealand each quarter. We find that, at some horizons, the factor model produces forecasts of similar accuracy to the Reserve Bank's forecasts. Analysing the marginal value of each of the data releases reveals the importance of the business opinion survey data—the Quarterly Survey of Business Opinion and the National Bank's Business Outlook survey—in determining how factor model predictions, and the uncertainty around those predictions, evolve through each quarter.     

Do FOMC forecasts add value to staff forecasts?

This paper compares the economic forecasts of members of the Board of Governors and presidents of the Federal Reserve Banks, and then investigates the value of each group's forecasts in supplementing the forecasts of the Board of Governors' staff. We find that the presidents tend to forecast higher inflation and real GDP growth, and lower unemployment than the members of the Board of Governors. We also find that the presidents' real GDP and unemployment rate forecasts add value to the real economy forecasts of the staff, while the governors' inflation forecasts add value to the staff's inflation forecasts.     

Oil price forecasting under asymmetric loss

Based on the approach developed by Elliott et al. (2005), we found that the loss function of a sample of oil price forecasters is asymmetric in the forecast error. Our findings indicate that the loss oil price forecasters incurred when their forecasts exceeded the price of oil tended to be larger than the loss they incurred when their forecast fell short of the price of oil. Accounting for the asymmetry of the loss function does not necessarily make forecasts look rational.     

The rationality of EIA forecasts under symmetric and asymmetric loss

The United States Energy Information Administration publishes annual forecasts of nationally aggregated energy consumption, production, prices, intensity and GDP. These government issued forecasts often serve as reference cases in the calibration of simulation and econometric models, which climate and energy policy are based on. This study tests for rationality of published EIA forecasts under symmetric and asymmetric loss. We find strong empirical evidence of asymmetric loss for oil, coal and electricity prices as well as natural gas consumption, electricity sales, GDP and energy intensity.     

Is there a Core of Macroeconomics that Euro Area Forecasters Believe In?

The quantity theory of money, Okun's law, and the Phillips curve are cornerstones of macroeconomic theory. But are they also of practical relevance? Using survey data for the euro area, we found that professional economists’ forecasts are consistent with a version of the quantity theory in which forecasts of the growth rate of money supply correlate in a proportional way with forecasts of the inflation rate. We also found that forecasts of changes in the unemployment rate and forecasts of the growth rate of real output are consistent with Okun's law. Evidence of a systematic link between forecasts of the inflation rate and forecasts of the unemployment rate, however, is not strong.     

Semi‐Parametric Estimates of Taylor Rules for a Small,Open Economy – Evidence from Switzerland

This article estimates the policy reaction function of the Swiss National Bank (SNB) using real‐time internal inflation forecasts and output gap estimates from 2000 to 2012. We analyze potential nonlinearities of policy rate responses to economic fundamentals using a novel semiparametric approach. We find a linear response of the SNB's policy rate to inflation forecasts but a strong nonlinear response of the policy rate to the output gap and exchange rate changes. This finding suggests that the SNB reacts to extreme movements of these variables if they become a concern for price stability and economic activity.     

An explanation for the price puzzle: Asymmetric information and expectation dynamics

Using theoretical and empirical analyses, this paper shows that the expectation dynamics induced by information asymmetry between the Central Bank (CB) and the public can cause the price puzzle. The signalling and learning dynamics between the CB and a representative private-sector agent under asymmetric information is investigated. Inflation positively reacts to contractionary monetary policy because the change in the interest rate is perceived as a signal of the CB’s private information about higher future inflation and output by the public. The empirical section of the paper validates this theoretical argument using a VAR specification about the US economy. Besides providing an explanation for the price puzzle, the results of this paper has practical implications about transparency and monetary policy. The theoretical and empirical findings indicate that asymmetric information causes significant frictions in the transmission mechanism of monetary policy. These frictions induce short-run undesired effects like increase in expected inflation and actual inflation as a response to contractionary monetary policy which is identified as “the price puzzle”.     

A directional analysis of Federal Reserve predictions of growth in unit labor costs and productivity

Existing evidence suggests that the Federal Reserve forecasts of inflation imply asymmetric loss, as the Fed has significantly over‐predicted inflation for the post‐Volcker period. Consistent with such evidence, we show that the Federal Reserve forecasts of growth in both unit labor costs and productivity, while directionally accurate for 1983–2003, imply asymmetric loss. That is, the forecasts of growth in unit labor costs are more (less) accurate in predicting the upward (downward) moves. The forecasts of growth in productivity, however, are less (more) accurate in predicting the upward (downward) moves. The interpretation of our findings may be that, in achieving long‐term price stability, the Fed is cautious not to incorrectly predict the upward (downward) moves in growth in unit labor costs (productivity).     

Estimating loss functions of experts

We propose a new and simple methodology to estimate the loss function associated with experts’ forecasts. Under the assumption of conditional normality of the data and the forecast distribution, the asymmetry parameter of the lin–lin and linex loss function can easily be estimated using a linear regression. This regression also provides an estimate for potential systematic bias in the forecasts of the experts. The residuals of the regression are the input for a test for the validity of the normality assumption. We apply our approach to a large data set of SKU-level sales forecasts made by experts, and we compare the outcomes with those for statistical model-based forecasts of the same sales data. We find substantial evidence for asymmetry in the loss functions of the experts, with underprediction penalized more than overprediction.     

The signaling effect of tax rates under fiscal competition: A (Shannonian) transfer entropy approach

The present paper argues that if the production factors are mobile, then the countries engaged in fiscal competition are less able to choose fully autonomously a taxation regime, since they have to prevent capital and labor migration. One significant consequence is that changes in neighbor states' fiscal policies may trigger asymmetric information flows between them. We used the (Shannonian) transfer entropy in describing such flows. This measure of information exchanges is useful given that it may be used to detect various types of asymmetry in the interaction among two systems and, thus, distinguishes between driving and responding forces. We examine the European Union's case for a time span between 1995 and 2011 and conclude that Northern Europe, the Germanic countries, the United Kingdom and Ireland are generating the dominant net information outflows.     

Asymmetric impact of relative price shocks in presence of trend inflation

This study examines whether skewness of cross-sectional distribution of relative price shocks has asymmetric impact on aggregate inflation. The empirical evidence from major economies suggests that the positively skewed shocks have different impact from that of negatively skewed shocks on aggregate inflation. In particular, the empirical results indicate that this asymmetry in the impact of relative price shocks mainly depends on the nature of trend that inflation exhibits for a given period. The crucial inference that emerges from the empirical findings is that the traditional approach of using a simple linear regression model, to examine the relationship between inflation and skewness in presence of trend inflation, is not appropriate as it may lead to misleading conclusions.     

Has The Accuracy of Macroeconomic Forecasts for Germany Improved?

This study asks whether the accuracy of macroeconomic forecasts for Germany has improved over time. We examine one‐year‐ahead forecasts of rates of real GDP growth and inflation for the years 1967–2010, by three major German forecasters and the OECD. We find that overall error levels are high but not much different from those of the U.S. and U.K. In the 1980s and 1990s accuracy improved somewhat, but has now returned to its 1970s level, indicating that it reflects the variance of growth and inflation. Benchmark comparisons with these predictions with ex post forecasts of a macroeconometric model indicate that accuracy can be improved, but it will be difficult to achieve.     

The evolution of inflation expectations in Canada and the US

We model inflation forecasts as monotonically diverging from an estimated long‐run anchor point towards actual inflation as the forecast horizon shortens. Fitting the model with forecaster‐level data for Canada and the US, we identify three key differences between the two countries. First, the average estimated anchor of US inflation forecasts has tended to decline gradually over time in rolling samples, from 3.4% for 1989–1998 to 2.2% for 2004–2013. By contrast, it has remained close to 2% since the mid‐1990 for Canadian forecasts. Second, the variance of estimates of the long‐run anchor is considerably lower for the panel of Canadian forecasters than US ones following Canada's adoption of inflation targets. And third, forecasters in Canada look much more alike than those in the US in terms of the weight that they place on the anchor. One explanation for these results is that an explicit inflation‐targeting regime (Canada) provides for less uncertainty about future monetary policy actions than a monetary policy regime where there was no explicit numerical inflation target (the US before 2012) to anchor expectations.     

Asymmetric Behaviour of Inflation around the Target in Inflation‐Targeting Countries

We explore the asymmetric behaviour of inflation around the target level for inflation‐targeting countries. The first rationale behind this asymmetry is the asymmetric policy response of the central bank around the target. Central banks could have a stronger bias towards overshooting rather than undershooting the inflation target. Consequently, the policy response would be stronger once the inflation jumps above the target, compared to a negative deviation. Second rationale is the asymmetric inflation persistence. We suggest that recently developed Asymmetric Exponential Smooth Transition Autoregressive (AESTAR) model provides a convenient framework to capture the asymmetric behaviour of inflation driven by these two effects. We further conduct an out‐of‐sample forecasting exercise and show that the predictive power of AESTAR model for inflation is high for some countries in our sample, especially at long‐horizons.