Forecast rationality tests in the presence of instabilities, with applications to Federal Reserve and survey forecasts

Rossi, Barbara, 1971-; Sekhposyan, Tatevik

Forecast rationality tests in the presence of instabilities, with applications to Federal Reserve and survey forecasts

License

Citation

Journal of Applied Econometrics, 31(3), 457-610, April-May 2016

Abstract

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.