The Federal Reserves Forecast Asymmetries Over the Business

Cycle
+
Julieta Caunedo
Department of Economics
Washington University at St. Louis
Riccardo DiCecio
Research Division
Federal Reserve Bank of St. Louis
Ivana Komunjer
Department of Economics
University of California, San Diego
Michael T. Owyang
Research Division
Federal Reserve Bank of St. Louis
Keywords: forecast rationality, loss function, Taylor rule, Greenbook forecasts
Preliminary and Incomplete: Please Do Not Cite or Distribute
October 30, 2011
Abstract
We jointly test the rationality of the Federal Reserves Greenbook forecasts of ination, un-
employment, and output using the multivariate nonseparable asymmetric loss function described
in Komunjer and Owyang (2007). We nd that the forecasts are rationalizable but exhibit di-
rectional asymmetry which depends on the phase of the business cycle. In particular, we nd
that the Greenbook output forecasts tend to be conservative (i.e., positive in recessions and
negative in expansions). These results have potetnially important implications for thistorical
analysis of monetary policy. [JEL codes: C32; E32]

Kate Vermann provided research assistance. The authors benetted from comments from and conversations
with Costats Azariadis, Mike McCracken, and Chris Otrok. Views expressed here are the authors alone and do not
reect the opinions of the Federal Reserve Bank of St. Louis or the Federal Reserve System.
1 Introduction
The Federal Reserve produces a set of forecasts used to conduct monetary policy. Made publicly
available at a 5-year lag, these so-called Greenbook forecasts have been used to study various aspects
of Fed behavior such as whether the Feds forecasts are rationalizable or whether the Fed has an
informational advantage over the private sector. For example, others have previously found that
Feds forecast errors are, on average, biased and/or correlated with the information available at
the time the forecasts are made. Standard tests e.g., those employing TheilMincerZarnowitz
regressions subsequently reject that the Fed forecasts are rationalizable.
More recent studies, however, have augmented these rationality tests by allowing for direc-
tionally asymmetric preferences (see Elliott, Komunjer, and Timmermann, 2005 and 2008). For
example, private sector output forecasts might be used to predict demand for a product. Under-
predicting output could lead to excess demand; overprediction could result in excess supply. Once
could imagine circumstances in which the forecaster in this case, the rm producing the output
might not experience equal loss for the two cases. After allowing asymmetric loss, Elliott, Ko-
munjer, and Timmermann (2008, EKT) show that the majority of forecasters produce forecasts
which are rationalizable. The interest then becomes the nature of the forecasters preferences i.e.,
does she prefer missing high versus missing low? Komunjer and Owyang (2007) extend EKT by
proposing a family of nonseparable asymmetric loss functions. In their paper, the loss depends on
the joint outcome rather than simply the sum of the individual losses.
We reconsider the rationalizability of the Greenbook forecasts allowing for the asymmetric non-
separable preferences described in Komunjer and Owyang. We evaluate forecasts of output growth,
unemployment, and ination. We allow the forecasters in this case, the Feds preferences to be
state dependent, varying over the business cycle. We nd that the Feds directional preferences ap-
pear to change over the cycle: The Fed prefers overprediction during recessions and underprediction
during expansions.
We are not the rst to study Greenbook forecasts. Using the univariate losses proposed by EKT,
Capistrn (2008) found the Greenbook forecasts to be rationalizable. He also argued that Paul
Volckers appointment as Chairman was associated with changes in the Federal Reserves forecast
behavior (see also Orphanides, 1998; Orphanides, 2000; Clarida, Gal, and Gertler, 1999). Studying
1
the Feds ination forecasts, Capistrn nds that the Fed was essentially directionally symmetric
prior to Volcker but preferred overprediction of ination post-Volcker. Our results slightly con-
trast Capistrns: We nd that the Fed is directionally symmetric over ination outcomes during
expansions both pre- and post-Volcker but overpredicts ination during recessions.
The balance of the paper is outlined as follows: Section 2 reviews the multivariate nonseparable
asymmetric loss function and its properties. We also provide an illustrative example of nonseparable
versus separable loss. Section 3 describes the Greenbook forecast data, the realization data, and
the instruments. This section also describes the estimation of the loss function parameters and the
J-test used to evaluate forecast rationality. Section 4 describes the results of the forecast rationality
test and the estimates of the asymmetry parameters in the forecast loss function. Section 5 discusses
the implications of the precious sections ndings for modeling monetary policy. Section 6 concludes.
2 Multivariate Forecast Rationality and Asymmetric Loss
Past studies have sought to test the rational expectations hypothesis by evaluating private sector
forecasts. Using the earliest methods (e.g., the TheilMincerZarnowitz regressions), a forecast
was deemed rational if the forecast errors were mean zero and uncorrelated with information avail-
able at the time that the forecast is made (Theil, 1958; Mincer and Zarnowitz, 1969; Figlewski and
Wachtel, 1981; Mishkin, 1981; Zarnowitz, 1985; Keane and Runkle, 1990). Many if not most of
these studies found evidence against rationality. These methods, however, implicitly assume that
the forecasters loss function is symmetric (and, in most cases, quadratic).
More recently, Elliott, Komunjer, and Timmermann (2005, EKT) introduced a family of uni-
variate asymmetric loss functions and showed that private sector forecasts can be rationalizable
under this new loss. Unlike quadratic or linear loss, asymmetric loss assigns dierent penalties
depending on whether the realization was above or below the forecast. As an example, EKT
found that private sector forecasts could be rationalizable if forecasters were attaching more loss
to overpredicting output growth than underpredicting.
Komunjer and Owyang (2011, KO) generalized the asymmetric loss introduced by EKT to allow
for joint outcomes. Using individual Blue Chip forecasts, they estimated asymmetric nonseparable
loss function parameters for ination, output, and a short term interest rate. They found that
2
forecasters loss was increased with unexpectedly worse joint economic outcomes, i.e., lower-than-
expected output growth, looser-than-expected monetary policy, and higher-than-expected ination.
2.1 Nonseparable Asymmetric Loss
In this section, we describe the framework with which we can test the rationalizability of the
Greenbook forecasts and characterize the directional asymmetry if any in the Feds forecast
loss function. We adopt the multivariate nonseparable asymmetric loss framework of KO. The
forecaster attempts to predict future values of an ( 1) vector of macroeconomic variables y
t
.
Dene f
t+s;t
as the forecast of the :period-ahead y
t+s
computed using information available at
time t. The forecasters information set T
t
may include lagged values of y
t
in addition to other
covariates used to predict y
t+s
. Dene e
t+1
as the forecast errors for y
t
, where e
t+1
= y
t+1
f
t+1;t
.
The forecasters problem is to construct a prediction which, conditional on information known at
time t, minimizes the expected loss:
1
p
(, e) =

|e|
p
+
0
e

|e|
p1
p
, (1)
where |u|
p
is the |
p
-norm of the vector u = (n
1
, . . . , n
n
)
0
R
n
.
1;2
The asymmetric nonseparable loss function (1) has + 1 parameters: j, 1 6 j < , and an
( 1) vector , 1 6 t
n
6 1. The parameter j determines the shape of the loss function. When
j = 1, the loss function collapses to a univariate tick loss sometimes used in quantile estimation.
The vector governs the degree of asymmetry associated with each of the forecasted variables.
For = 0, there is no asymmetry 1
p
(, e) is additively separable and places equal weight on
forecast errors in either direction. If any element t
n
is nonzero, t
n
determines both the direction and
magnitude of the asymmetry. For example, values of t
n
greater than zero indicate greater loss for
positive forecast error (underprediction). Greater loss means that, conditional on the information
at time t, the distribution of forecast errors will have nonzero mean. The larger is [t
n
[, the greater
the loss and the more the distribution of forecast error will be biased away from zero.
1
KO show that (i) Lp (; ) is continuous and non-negative on R
n
; (ii) Lp (; e) = 0 if and only if e = 0 and
lim
kek
p
!1
Lp (; e) = 1; (iii) Lp(; ) is convex on R
n
. Detailed proofs of these assertions can be found in the
appendix of KO.
2
In the univariate case, this exible loss family includes: (i) squared loss function L2(0; e) = e
2
, (ii) absolute
deviation loss function L1(0; e) = jej, as well as their asymmetric counterparts obtained when 6= 0 (or 6= 1=2)
which are called (iii) quad-quad loss L2(; e), and (iv) lin-lin loss L1(; e).
3
In the separable case, each t
n
measures magnitude of the directional asymmetry for a single
variable. In the nonseparable case, can be thought to measure both the asymmetry for directional
forecast errors and the asymmetry across variables. Thus, determines the relative importance of
the directional errors for each forecasted variable.
The forecasters problem outlined above does not depend on the model used to generate the
forecasts. We can think of the loss function as aecting the forecasters estimates of the coecients
of whatever model she uses. This means that the model that the forecaster uses does not aect the
econometricians estimates of her loss function parameters. Also, these estimates do not depend on
the scheme rolling or recursive that the forecaster uses to construct the time series of forecasts.
2.2 An Illustrative Example
The consequences of nonseparable asymmetric loss can be made more apparent by describing the
bivariate case. For simplicity of exposition, also assume j = 2. In this case, the loss function (1)
can be rewritten as
1
2
(, e) = c
2
1
+ c
2
2
+ (t
1
c
1
+ t
2
c
2
)

c
2
1
+ c
2
2

1=2
. (2)
The shapes of iso-loss curves representing combinations of forecast errors corresponding to con-
stant loss are determined by the parameters t
1
and t
2
. Figure 1 shows the iso-loss curves for a
few dierent parameterizations. When t
1
= t
2
= 0, the loss 1
2
(, e) symmetric and the iso-loss
curves are perfectly circular. If either t
1
,= 0 or t
2
,= 0, the iso-loss curves are warped in the
direction of the asymmetry. The closer the iso-loss curve is to the origin, the larger is the loss for
those directional forecast errors for that variable. Note that, even if loss is directionally symmetric
in one variable (i.e., t
1
= 0), asymmetry in any other variable (i.e., t
2
,= 0) can produce bias in
the forecasts of j
1
though the nonseparability. This eect is revealed in the third term of (2) when
t
1
= 0. The loss induced by c
1
is c
2
1
+ (t
2
c
2
)

c
2
1
+ c
2
2

1=2
, which depends on both the magnitude
and direction of c
2
. Note, however, that if t
1
= 0, the direction of c
1
does not enter the loss.
We can also examine the forecasts which would be produced from various parameterizations of
the loss function. Suppose that y
t
is generated from a VAR(1):
y
t
= c +Ay
t1
+ "
t
, (3)
4
where "
t
is iid multivariate normal with zero mean and covariance matrix .
3
Based on the loss
function, the one-period-ahead forecast is
^
f
t+1;t
= ^ c +
^
j
t
, where
(^c,
^
A) = arg min
(c; A)
1
1
P
X
t=1
1
2
(, y
t+1
c Ay
t
), (4)
which minimizes the expected value of the loss conditional on the data and a correctly specied
VAR(1), (3). We then construct j = 250 periods of bivariate forecasts for given sets of asymmetry
parameters using the same generated data.
The joint distribution of the resulting bivariate time series of forecasts are shown in Figure
2. The directional asymmetry in the loss function is evident in the bias of the forecast errors.
Moreover, as the second panel shows, the distribution of the forecast errors for a variable whose
loss is symmetric can still be biased if there exists any directional asymmetry in the joint loss
function.
3 Data and Estimation
3.1 Data
Our dataset contains three components: (1) the forecast data; (2) the realizations; and (3) the
instruments used to test rationality with a total sample period of 1966:09 to 2005:12. The forecast
data are the one- and two-period-ahead forecasts of output growth, ination, and unemployment
taken from the Greenbook. The Greenbook forecasts are publicly available at a 5-year lag and vary
in frequency over the sample period. At the beginning of the sample, the Greenbook forecasts were
available monthly; subsequent to 1979, the Greenbook was constructed only for FOMC meetings.
Thus, prior to 1979, we have 12 monthly vectors of observations per year; after 1979, we have eight
or nine irregular observations per year.
The realization data are a matter of some controversy, the answer to which depends on ones
beliefs about the veracity for data revisions. One could believe, for example, that the intent of the
forecaster is to predict the value of that was released in real time. That is, the forecaster tries to
3
To generate the data, we simulate T = R + P 1 periods of data from the VAR(1) after discarding the rst
1000 periods to remove any initial values eects. The forecaster uses a rolling window of size R = 100 to construct
P = 250 one-period-ahead forecasts.
5
predict the value of, say, 1979:I output growth which is released in April 1979. On the other hand,
one could argue that the initial release of the data are poor estimates and that the revisions which
occur over time make the data closer reections of the truth. If the forecasters intent is to predict
these values, one should use the most recent vintage of the data. Similar arguments can be made
for any intermediate vintage under the assumption that signicant amounts of data revisions are
unpredictable and outside the scope of most agents forecasting problems. Two common approaches
are taken in the literature. The rst is to use as realizations the one year revision of the data. The
second approach is to use the latest vintage. As a rst pass, we report results using the latest
available vintage (June 2011) as the realization.
In addition to changes in frequency, the Greenbook changes the forecasted output growth vari-
able in 1992 from GNP growth to GDP growth. In order to remain consistent, when the Greenbook
changes the forecasted variable, we change the realization that is, we match GNP with forecasted
GNP, etc.
Finally, we use as instruments one lag of the forecasted series available before the time that the
forecast is released.
4
Unfortunately, we cannot judge when exactly the forecast is created; we know
only the time at which the Greenbook was released. We, therefore, assume that any data released
in the previous month was available to the forecaster and would be suitable as an instrument.
Because forecasters wold not have revisions available at the time they made the forecasts, we use
the previous months vintage of the forecasted variables in our instrument set.
3.2 Estimation and Rationality Testing
KO show that the asymmetry parameters in the loss function can be estimated from the forecast
errors using GMM. KO also argue using Monte Carlo evidence that the shape parameter requires
a very long time series for inference much longer than we have for the Greenbook forecasts.
They suggest calibrating j; in sections to follow, we report results for j = 2. The estimation
attempts to choose the value of the asymmetry parameter which maximizes the GMM objective
function derived from the rst order condition for the nonseparable asymmetric loss. In doing so,
we ascertain estimates of t consistent with the data and the most favorable to rationality.
4
In principle, one could use many lags. KO, however, noted that this could lead to the common many instrument
problem and result in size distortions of the rationality test.
6
The resulting value of the GMM objective function is used to construct the J-statistic for use in
the rationality test. The test employs the standard test for overidentication to determine whether
the forecasts are rationalizable, conditional on the chosen instrument set.
4 Empirical Results
In this section, we assess the directional asymmetry in the Feds forecast loss function estimated
using the Greenbook forecasts. In evaluating the results, it is important to keep in mind that values
of t
n
greater than zero indicate greater loss for positive forecast error (underprediction).
4.1 Full Sample Results
To illustrate the eect of adding nonseparability to the forecasters loss function, we rst estimate
the as asymmetry parameters for the full sample. As a baseline for comparison, we obtain the
separable loss function parameters by estimating univariate versions of the loss function, (1). These
results are compared in Table 1. For the full sample, the Greenbook forecasts display statistically
signicant asymmetry for output growth and the unemployment. Ination, however, displays no
statistically signicant asymmetry. Consistent with results from KO, the nonseparable loss function
exhibits considerably less directional asymmetry for two of the three variables. For unemployment,
the separable and nonseparable loss functions yield similar asymmetry parameters.
Table 1 also shows the values of the J-statistic used to test rationality. As has been found in
previous studies, the J-test shows that, when accounting for potential directional asymmetry, the
Greenbook forecasts are rationalizable. This results is consistent across any sample split.
In the full sample, the directional asymmetry is similar for both unemployment and output
growth i.e., greater loss obtains when the forecaster underpredicts real variables. The opposite
occurs when forecasting ination overpredicting ination produces larger losses. These directional
asymmetries are consistent with those estimated by Capistrn for a shorter Greenbook forecast
sample. However, they appear to be opposite of those estimated for private sector forecasts (see,
for example, EKT for univariate loss and KO for multivariate loss). They also could be construed
as counterintuitive in that the Fed appears to incur higher loss for better economic outcomes
higher than predicted growth makes the Fed worse o.
7
4.2 Directional Asymmetry and the Business Cycle
Previous studies have argued that the Feds objective has changed over time. For example, Capistrn,
examining the Greenbook ination forecasts, split the samples in 1979 when Paul Volcker became
the chairman of the FOMC. Changes in the Feds policy preferences exhibited by shifts in the
ination and output responses in an empirical Taylor rule might also manifest in changes in the
forecasting preferences of the Fed. Indeed, Capistrn nds that the direction of the ination asym-
metry ips from the pre- to the post-Volcker regimes. In this section, we investigate whether there
may have been changes in the joint directional asymmetry associated with ination, unemployment,
and output.
As a motivating example, consider Figure 3, which plots the Greenbook forecast errors for
output, ination, and the unemployment rate, along with the NBER recession dates. The commonly
used Volcker split is shown by a vertical line. From the top panel (output), it is evident that
the asymmetry appears associated with the NBER recession periods, not necessarily the Volcker
split. During recessions, the forecast errors are generally positive; the reverse is true for expansion
periods. In light of this, we split the sample into three regimes: recessions, pre-Volcker expansions,
and post-Volcker expansions.
5
Table 2 presents the results with the three subsamples. To obtain these results, we took the
recession and expansion dates as determined by the NBER Business Cycle Dating Committee as
given. In addition, we split the expansion periods when Volcker takes oce in October, 1979.
When we consider ination in isolation, we nd results consistent with those found by Capistrn
(2008). In particular, the direction of the forecast asymmetry changes after Volcker enters oce.
During expansions, prior to October 1979, overprediction is more costly; after 1979, the directional
asymmetry reverses. Contrary to Capistrn, we nd that the directional asymmetry for ination
is statistically insignicant once we account for variation over phases of the business cycle. During
recessions, however, the Greenbook ination forecasts do exhibit astatically signicant directional
asymmetry: underprediction is more four times more costly than overprediction. This suggests
that the true directional asymmetry is being driven by recessions, two of which were considerably
5
The split of recessions into the pre- and post-Volcker periods is not particularly revealing because of the limited
total number of cycle periods.
As an alternative, we also considered the expansion split at the Great Moderation. Results were qualitatively
similar and are available upon request.
8
shallower than average in the post-Volcker period.
For the real variables, unemployment and output growth, we nd directional asymmetry across
the business cycle phases. During recessions, the estimated asymmetry parameter for output growth
is negative and statistically signicant: The Fed has larger loss when worse output outcomes obtain
during recession. This result is contrary to the full sample result which suggested that the Fed
always prefers underprediction.
During expansions, the Fed experiences relatively larger loss if unemployment or output growth
are higher than predicted. While the direction of the forecast asymmetries for unemployment and
output are consistent for expansions before and after Volcker, the magnitudes of the asymmetries
do. After the break, the relative weight on output underpredictions declines and the relative weight
on unemployment underpredictions rises.
6
4.3 Dierentiating Between Directional Preferences and Bad Forecasting
Previous studies have found that identifying turning points is dicult. If the conditional means of
the variables of interest change across the turning points (e.g., in a model such as Hamilton, 1989),
could we mistake regime dependent forecast errors for directional preferences? In this subsection,
we make the case that it is unlikely that the directionality of the forecast errors are the result of
poor forecasting versus asymmetric preferences.
Suppose that the Feds forecasting model cannot predict turning points in real time. Expansions
are, by and large, the dominant business cycle phase. Thus, one would imagine that the forecast
during expansion should be more accurate than during recessions. Moreover, the forecast errors
should increase around turning points as the Fed learns only ex post that the state of the economy
has changed.
Reconsider the forecast errors from Figure 3. During the expansions occurring in rst part
of the sample, the forecast error is consistently negative. This suggests either a conscious intent
to underpredict output growth or a model in which output growth is forecast as an average over
business cycle periods. For three of the rst four recessions, however, the forecast errors are
relatively small after the turning point and increase in magnitude over the recessions. Moreover,
6
This may reect a change in emphasis in policy associated with the volatility reduction in output and increased
unemployment in expansions due to the jobless recoveries.
9
the direction of the forecast error is positive: the realized value is greater than the forecast. This
suggests that, during recessions, as the Fed becomes aware of the state of the economy, the forecast
is pushed lower and the magnitude of the recession is overestimated. The Feds forecasts over the
recessions belies a simple average model of the output growth rate.
Finally, if one believes that the change in directional asymmetry across business cycle phases
occurs because of some characteristic of the Feds model rather than a true change in preferences,
there are still implications to the analysis above. In the following section, we detail some of these
implications which will not depend on the business cycle dependence of preferences it is enough
that forecasts have a systematic bias in expansions.
5 Economic Implications of Asymmetric Rationality
The results in the preceding section suggest that the Greenbook forecasts can be rationalized only
with asymmetric directional preferences and that the direction of the asymmetry changes over the
business cycle. But what does it mean that the Fed has asymmetric preferences? Many standard
models of rationality (e.g., Quad-Quad loss) imply that the distribution of forecast error is mean
zero that is, )
t+h
= j
t+h
+ c
t+h
, where c
t+h
is mean zero and uncorrelated with T
t
. Thus, our
results may have implications for models which rely on (mean zero) rationality.
As an example, Clarida, Gal, and Gertler (2000) suggest that the parameters in a forward-
looking Taylor rule can be estimated using GMM under the assumption of rational expectations.
7
Consider a standard forward-looking Taylor rule:
r
t
= jr
t1
+ (1 j) [, (1
t

t+h

) + 1
t
r
t+h
] + -
t
,
where 1
t

t+h
is the forecasted ination rate at a horizon /;

is a target ination rate; 1

t
r
t+h
is
a forecast of the output gap at horizon /; and r
t
is the nominal interest rate (usually the fed funds
rate). Clarida, Gal, and Gertler rewrite this as:
r
t
= jr
t1
+ (1 j) [r

+ (1 + ,)
t+h
+ r
t+h
] + -
t
,
7
Judd and Rudebusch (1998), Woodford (2003), and Stock and Watson (2002), typically deal with backward
looking rules. In contrast, Clarida, Gali and Gertler (2000), Orphanides (2002), and, more recently, Boivin (2006)
make inferences for a forward looking rule.
10
where r

is a steady-state interest rate and the error term

-
t
= (1 j) [,(
t;k
1
t

t+h
) + (r
t+h
1
t
r
t+h
)]
is a function of the dierence between the unobserved expectations and their future realizations.
Rationality implies that this dierence is orthogonal to information know at time t. Thus, we can
estimate the Taylor rule coecients using a GMM orthogonality condition of the form:
1 r
t
jr
t1
+ (1 j) [r

+ (1 + ,)
t+h
+ r
t+h
] z
t
= 0,
where z
t
T
t
is a vector of instruments known at time t.
8
Implicit in the Clarida, Gal, and Gertler estimation is the assumption that 1
t

t+h
=
t+h
and
1
t
r
t+h
= r
t+h
i.e., the expectations (forecasts) errors are mean zero rational. If one believes that
the Greenbook forecasts are produced for policymaking, an instrumental variables approach that
does not take into account the bias in the forecast errors will produce biased TR coecients. If
the forecasts are systematically upwardly (downwardly) biased, the Taylor rule coecients will be
downward (upward) biased.
6 Conclusions
In this paper, we applied the methods of Komunjer and Owyang (2007) to the Federal Reserves
Greenbook forecasts. Similar to other papers, we nd that, once accounting for directional asym-
metry, the Greenbook forecasts are rationalizable. Unlike other papers before us, we nd that, once
accounting for dierences across the business cycle, the Feds directional preference over ination
during expansion disappears.
Our results have implications for the estimation of forward-looking monetary policy rules. If
one believes that the Fed uses the Greenbook forecasts in making policy, the zero mean forecast
error assumption underlying standard GMM estimation of Taylor rules is violated. This results in
8
Orphanides (2002) estimated the Taylor rule with real time data using Greenbook forecasts as instruments.
He showed that, using these data, the orthogonality condition fails. Boivin (2006) estimates a dynamic version of
Orphanides (2002) which allows the Taylor rule parameters to change over time. He makes explicit the fact that a
critical assumption is that the Greenbook forecasts are contemporaneously uncorrelated with the policy shock (i.e.,
the error term in the Taylor equation). However, if the policy rule changes with the business cycle, the Greenbook
forecast will typically not be orthogonal to the policy shock.
11
biased Taylor rule coecients and a misinterpretation of the intentions of policy. This point was
initially made by Orphanides (2004) but, here, has a behavioral interpretation.
12
References
[1] Capistrn, Carlos (2008) Bias in Federal Reserve Ination Forecasts: Is the Federal Reserve
Irrational or Just Cautious? Journal of Monetary Economics, 55(8): 1415-1427.
[2] Clarida, Richard; Gertler, Mark; and Jordi Gal (2000) Monetary Policy Rules and Macro-
economic Stability: Theory and Some Evidence. Quarterly Journal of Economics, 115(1):
147-180.
[3] Elliott, Graham; Komunjer, Ivana; and Allan Timmermann (2005) Estimation and Testing
of Forecast Rationality Under Flexible Loss. Review of Economic Studies, 72(4): 1107-1125.
[4] Elliott, Graham; Komunjer, Ivana; and Allan Timmermann (2008) Biases in Macroeconomic
Forecasts: Irrationality or Asymmetric Loss? Journal of the European Economic Association,
6(1): 122-157.
[5] Ellison, Martin and Thomas J. Sargent (2009) A Defence of the FOMC. Economics Series
Working Papers 457, University of Oxford.
[6] Faust, Jon and Jonathan Wright. (2009) Comparing Greenbook and Reduced Form Forecasts
using a Large Realtime Dataset. Journal of Business and Economic Statistics, 146(2): 293-
303.
[7] Figlewski, Stephen and Paul Wachtel (1981) The Formation of Inationary Expectations.
The Review of Economics and Statistics, 63(1): 1-10.
[8] Justiniano, Alejandro and Giorgio E. Primiceri (2008) The Time-Varying Volatility of Macro-
economic Fluctuations. American Economic Review, 98(3): 604-641.
[9] Keane, Michael P. and David E. Runkle (1990) Testing the Rationality of Price Forecasts:
New Evidence from Panel Data. American Economic Review, 80(4): 714-735.
[10] Komunjer, Ivana and Michael T. Owyang (2008) Multivariate Forecast Evaluation and Ra-
tionality Testing. The Review of Economics and Statistics, forthcoming.
13
[11] Mincer, Jacob and Victor Zarnowitz (1969) The Evaluation of Economic Forecasts in Jacob
Mincer (ed.), Economic Forecasts and Expectations. New York: National Bureau of Economic
Research.
[12] Mishkin, Frederic S. (1981) Are Market Forecasts Rational? American Economic Review,
71(3): 295-306.
[13] Orphanides, Athanasios (2001) Monetary Policy Rules Based on Real-Time Data, American
Economic Review, 91(4): 964-985.
[14] Orphanides, Athanasios (2002) Monetary-Policy Rules and the Great Ination. American
Economic Review: Papers and Proceedings. 92(2): 115-120.
[15] Orphanides, Athanasios (2004) Monetary Policy Rules, Macroeconomic Stability, and Ina-
tion: A View from the Trenches. Journal of Money, Credit, and Banking. 36(2): 151-175.
[16] Romer, Christina D. and David H. Romer (2004) A New Measure of Monetary Shocks:
Derivation and Implications. American Economic Review, 94(4): 1055-1084.
[17] Romer, Christina D. and David H. Romer (2008) The FOMC Versus the Sta: Where Can
Monetary Policymakers Add Value? American Economic Review, 98(2): 230-235.
[18] Swanson, Norman R. and Dick van Dijk (2006) Are Statistical Reporting Agencies Getting It
Right? Data Rationality and Business Cycle Asymmetry. Journal of Business and Economic
Statistics, 24(1): 24-42.
[19] Theil, Henri (1958) Economic Forecasts and Policy. Amersterdam: North-Holland Publishing
Co.
[20] Zarnowitz, Victor (1985) Rational Expectations and Macroeconomic Forecasts. Journal of
Business and Economic Statistics, 3(4): 293-311.
14
Nonseparble Separable
Unemp Output Ination Unemp Output Ination
0.196 0.367 -0.017 0.177 0.770 -0.125
J-Stat 3.89 3.80
Table 1: Full Sample Results. Notes: The table contains the asymmetry parameters for the separable and
nonseparable losses for the full sample, 1966 to 2005. The J-Stat is constructed from the GMM objective function.
Derivation of the J-Stat is described in detail in Komunjer and Owyang (2007).
Unemp Output Ination Sample
Full 0.196 0.367 -0.017 9/66 - 12/05
Recession -0.281 -0.114 -0.054 n/a
Pre-GM Exp. 0.295 0.577 -0.012 9/66 - 12/83
Post-GM Exp. 0.424 0.359 0.001 1/85 - 12/05
Table 2: Split Sample Results. Notes: The table contains the estimated asymmetry parameters for the non-
separable loss for the split sample. The recession dates are taken from the NBER Business Cycle Dating Committee.
Figure 1: Notes: The gure depicts the Iso-loss contours for given asymmetry parameters for the
nonseparable (left) and separable (right) loss functions.
15
Figure 2: Notes: The gure depicts the Iso-loss contours for given asymmetry parameters for the
nonseparable (left) and separable (right) loss functions.
Figure 3: The gure depicts the forecast error distributions using 10000 simulated data points
constructed from a VAR(1) with the given asymmetry parameters.
16
Figure 4: The gure depicts the forecast error distributions using 10000 simulated data points
constructed from a VAR(1) with the given asymmetry parameters.
Figure 5: The gure depicts the forecast error distributions using 10000 simulated data points
constructed from a VAR(1) with the given asymmetry parameters.
17
Figure 6: The gure shows the forecast errors for the unemployment rate constructed from the
Greenbook. NBER recessions are shaded in gray. The forecast errors are constructed assuming
that the realizations of unemployment are the current (2011) vintage.
Figure 7: The gure shows the forecast errors for the output growth rate constructed from the
Greenbook. Output in this gure is dened as GNP prior 1992 and GDP thereafter. NBER
recessions are shaded in gray. The forecast errors are constructed assuming that the realizations of
output growth are the current (2011) vintage.
18
Figure 8: The gure shows the forecast errors for the ination rate constructed from the Green-
book. NBER recessions are shaded in gray. The forecast errors are constructed assuming that the
realizations of ination rate are the current (2011) vintage.
19