Forecasting with Feedback
Miércoles 26/3, 17.15h
Seminario presentado por Augusto Nieto-Barthaburu
Paper abstract
Systematically biased forecasts are typically interpreted as evidence of forecasters’ irrationality and/or asymmetric loss. In this paper we propose an alternative explanation: when forecasts inform policy decisions, and the resulting actions affect the realization of the forecast target itself, forecasts may be optimally biased even under quadratic loss. The result arises in environments in which the forecaster is uncertain about the policy-maker’s reaction to the forecast, which is presumably the case in most applications. We motivate our theory by reviewing some stylized properties of Greenbook inflation forecasts. Our results point out that the presence of policy feedback poses a challenge to traditional tests of forecast rationality.
Systematically biased forecasts are typically interpreted as evidence of forecasters’ irrationality and/or asymmetric loss. In this paper we propose an alternative explanation: when forecasts inform policy decisions, and the resulting actions affect the realization of the forecast target itself, forecasts may be optimally biased even under quadratic loss. The result arises in environments in which the forecaster is uncertain about the policy-maker’s reaction to the forecast, which is presumably the case in most applications. We motivate our theory by reviewing some stylized properties of Greenbook inflation forecasts. Our results point out that the presence of policy feedback poses a challenge to traditional tests of forecast rationality.
Augusto Nieto-Barthaburu
Ph. D. in Economics, University of California, San Diego. He is an Associate Professor of Economics at Universidad Nacional de Tucuman, Argentina. His main research interests are in Applied Microeconomic Theory.