Asymmetric loss in the Greenbook and the Survey of Professional Forecasters

This paper examines the forecast rationality of the Greenbook and the Survey of Professional Forecasters (SPF) under asymmetric loss functions, using the method proposed by Elliott, Komunjer, and Timmermann (2005) with a rolling window strategy. Over rolling periods, the degree and direction of the asymmetry in forecast loss functions are time-varying. While rationality under symmetric loss is often rejected, forecast rationality under asymmetric loss fails to be rejected over nearly all rolling periods. Besides, real output growth is consistently under-predicted in the 1990s, and the inflation rate is consistently over-predicted in the 1980s and 1990s. In general, inflation forecasts, especially for long horizons, exhibit greater levels of loss asymmetry in magnitude and frequency. The loss asymmetry of real output growth forecasts is more pronounced when the last revised vintage data are used than when the real-time vintage is used. All of these results hold for both the Greenbook and SPF forecasts. The results are also similar with the use of different sets of instrumental variables for estimating the asymmetric loss and testing for forecast rationality.