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Central bank projections have gained considerable attention for monetary policy modeling. However, less is known about the nature of central bank projections. This letter explores the unbiasedness and rationality of more than 2; 000 growth and in ation projections published by 15 major central banks. The results indicate that central bank projections are in most cases rational and unbiased. Interestingly,
in ation projections are more biased than growth projections.
In this paper, we study the bias in interest rate projections for four central banks, namely for Czech Republic, New Zealand, Norway, and Sweden. We examine whether central bank projections are based on an asymmetric loss function and report evidence that central banks perceive an overprojection of their longer-term interest rate forecasts as twice as costly as an underprojection of the same size. We document that rationality is consistent with biased interest rate projections which contribute to explaining the central banks’ behavior.
This paper uses the Consensus Economic Forecast poll to investigate how forecasters in the foreign exchange market form expectations. In order to explain the expectation formation of forecasters, around 50,000 forecasts for 22 OECD-member currencies are analyzed. The results indicate that forecasters do not form expectations rationally when tested for unbiasedness and orthogonality. The results also suggest that forecasts for industrialized economies show a mix of trend-following and fundamentally-oriented behavior. By contrast, forecasts for emerging markets show significantly more destabilizing expectations. We find forecasting tendencies to strengthen in the short-run and medium-run when controlling for the Balassa-Samuelson effect. For long-run forecasts however this can not be confirmed.
Using a large international data set we analyze whether business cycle forecasters tend to herd or anti-herd. Applying different measures of economic crises, we distinguish between normal economic circumstances and times of crises. We fnd evidence for anti-herding behavior for most industrial economies, i.e. forecasters eliberately stick out their neck with extreme forecasts for strategic reasons. For a set of emerging market economies, by contrast, we find evidence for herding behavior. We relate this finding to the high incidence of economic and financial crises in these countries. A test for herding behavior during economic crises confirms that forecasters tend to herd in times of high forecast uncertainty.