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State dependent asymmetric loss and the consensus forecast of real U.S. GDP growth

journal contribution
posted on 2014-01-01, 00:00 authored by M Higgins, Sagarika MishraSagarika Mishra
It has been well documented that the consensus forecast from surveys of professional forecasters shows a bias that varies over time. In this paper, we examine whether this bias may be due to forecasters having an asymmetric loss function. In contrast to previous research, we account for the time variation in the bias by making the loss function depend on the state of the economy. The asymmetry parameter in the loss function is specified to depend on set state variables which may cause forecaster to intentionally bias their forecasts. We consider both the Lin–Ex and asymmetric power loss functions. For the commonly used Lin–Ex and Lin–Lin loss functions, we show the model can be easily estimated by least squares. We apply our methodology to the consensus forecast of real U.S. GDP growth from the Survey of Professional Forecasters. We find that forecast uncertainty has an asymmetric effect on the asymmetry parameter in the loss function dependent upon whether the economy is in expansion or contraction. When the economy is in expansion, forecaster uncertainty is related to an overprediction in the median forecast of real GDP growth. In contrast, when the economy is in contraction, forecaster uncertainty is related to an underprediction in the median forecast of real GDP growth. Our results are robust to the particular loss function that is employed in the analysis.

History

Journal

Economic modelling

Volume

38

Pagination

627 - 632

Publisher

Elsevier BV

Location

Amsterda, The Netherlands

ISSN

0264-9993

Language

eng

Publication classification

C1 Refereed article in a scholarly journal; C Journal article

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