Central banks' inflation forecasts under asymmetric loss: Evidence from four Latin-American countries

- We study the rationality of central banks' inflation forecasts under asymmetric loss.
- We study data for four countries: Argentina, Brazil, Chile, and Mexico.
- Evidence against rationality weakens when we assume an asymmetric loss function.
- Central banks seem to incur a larger loss when they overpredict the inflation rate.
- We analyze alternative rationality tests, growth forecasts, and private-sector forecasts.

We study the rationality of the inflation forecasts of the central banks of Argentina, Brazil, Chile, and Mexico. We reject rationality under a symmetric (Chile is an exception) but not under an asymmetric loss function. An overprediction implies a larger loss than an underprediction. We also analyze alternative rationality tests, growth forecasts, and private-sector forecasts.