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Download the Paper (1.1 MB, PDF file) - July 1, 2005 Tell a colleague about it. Printing Tips: Select 'print as image' in the Acrobat print dialog if you have trouble printing.

ABSTRACT:
Inflation forecasts of the Federal Reserve systematically under-predicted inflation before Volcker and systematically over-predicted it afterward. Furthermore, under quadratic loss, commercial forecasts have information not contained in those forecasts. To investigate the cause, this paper recovers the loss function implied by Federal Reserve’s forecasts. It finds that the cost of having inflation above an implicit time-varying target was larger than the cost of having inflation below it for the period since Volcker, and that the opposite was true for the pre-Volcker era. Once these asymmetries are taken into account, the Federal Reserve is found to be rational. (JEL C53, E52)

SUGGESTED CITATION:
Carlos Capistran Carmona, "Bias in Federal Reserve Inflation Forecasts: Is the Federal Reserve Irrational or Just Cautious?" (July 1, 2005). Department of Economics, UCSD. Paper 2005-05.
http://repositories.cdlib.org/ucsdecon/2005-05