E43 Determination of Interest Rates; Term Structure of Interest Rates
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Do FOMC members herd?
(2011)
Twice a year FOMC members submit forecasts for growth, unemployment and inflation to be published in the Humphrey-Hawkins Report to Congress. In this paper we use individual FOMC forecasts to assess whether these forecasts exhibit herding behavior, a pattern often found in private sector forecasts. While growth and unemployment forecast do not show herding behavior, the inflation forecasts show strong evidence of anti-herding, i.e. FOMC members intentionally scatter their forecasts around the consensus. Interestingly, anti-herding is more important for nonvoting members than for voters.
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.