Arbeitspapier
Using forecasts to uncover the loss function of FOMC members
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) in ation 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 Capistrán'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.
- Language
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Englisch
- Bibliographic citation
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Series: MAGKS Joint Discussion Paper Series in Economics ; No. 02-2013
- Classification
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Wirtschaft
Central Banks and Their Policies
Prices, Business Fluctuations, and Cycles: Forecasting and Simulation: Models and Applications
Macroeconomics: Consumption, Saving, Production, Employment, and Investment: Forecasting and Simulation: Models and Applications
- Subject
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Federal Open Market Committee
forecasting
asymmetric loss function
monetary policy
- Event
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Geistige Schöpfung
- (who)
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Pierdzioch, Christian
Rülke, Jan-Christoph
Tillmann, Peter
- Event
-
Veröffentlichung
- (who)
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Philipps-University Marburg, Faculty of Business Administration and Economics
- (where)
-
Marburg
- (when)
-
2013
- Handle
- Last update
-
10.03.2025, 11:44 AM CET
Data provider
ZBW - Deutsche Zentralbibliothek für Wirtschaftswissenschaften - Leibniz-Informationszentrum Wirtschaft. If you have any questions about the object, please contact the data provider.
Object type
- Arbeitspapier
Associated
- Pierdzioch, Christian
- Rülke, Jan-Christoph
- Tillmann, Peter
- Philipps-University Marburg, Faculty of Business Administration and Economics
Time of origin
- 2013
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