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Evaluating Federal Reserve predictions of growth in consumer spending

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Abstract:

This study shows that Federal Reserve forecasts of growth in both total consumption and durable spending are generally rational under asymmetric loss, and the forecasts of growth in nondurable (services) spending, while unbiased (biased), fail to be rational. Yet, these forecasts are all directionally accurate. The forecasts of growth in total consumption, durable and services spending are more (less) accurate in predicting the downward (upward) moves and are thus of value when policymakers assign more (less) cost to incorrect downward (upward) predictions. The forecasts of growth in nondurable spending are equally accurate in predicting the downward and upward moves and are thus of value when policymakers assign similar cost to both incorrect downward and upward predictions. Utilizing survey data to measure the private forecasts, we further provide partial support for the asymmetric information hypothesis that the Federal Reserve has useful information about the state of the economy that is not known by the public.

Keywords: E21; E27; E58; asymmetric information; asymmetric loss; directional accuracy; monetary policy; rationality

Document Type: Research Article

DOI: http://dx.doi.org/10.1080/00036846.2011.633893

Affiliations: Department of Economics,School of Business and Management, American University of Sharjah, PO Box 26666Sharjah, United Arab Emirates

Publication date: May 1, 2013

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