Forecast Rationality Tests in the Presence of Instabilities, With Applications to Federal Reserve and Survey Forecasts

• Authors: Barbara Rossi.
• BSE Working Paper: 110248 | September 15
• Keywords: forecasting , forecast rationality , regression-based tests of forecasting ability , Greenbook forecasts , survey forecasts , real-time data
• JEL codes: C22, C52, C53
• forecasting
• forecast rationality
• regression-based tests of forecasting ability
• Greenbook forecasts
• survey forecasts
• real-time data

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.