Rational Bias in Macroeconomic Forecasts - FEDERAL RESERVE BANK of NEW YORK

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Staff Reports

Rational Bias in Macroeconomic Forecasts

March 1997 Number 21

JEL classification: D84, E17, L86

Authors: David Laster, Paul Bennett, and In Sun Geoum

This paper develops a model of macroeconomic forecasting in which the wages firms pay their forecasters are a function of their accuracy as well as the publicity they generate for their employers by being correct. In the resulting Nash equilibrium, forecasters with identical models, information, and incentives nevertheless produce a variety of predictions in order to maximize their expected wages. In the case of heterogeneous incentives, the forecasters whose wages are most closely tied to publicity, as opposed to accuracy, produce the forecasts that deviate most from the consensus. We find empirical support for our model using a twenty-year panel of real GNP/GDP forecast data from the survey Blue Chip Economic Indicators. Although the consensus outperforms virtually every forecaster, many forecasters choose to deviate from it substantially and regularly. Moreover, the extent of this deviation varies by industry in a manner consistent with our model.

Available only in PDF PDF

46 pages / 161 kb

For a published version of this report, see David Laster, Paul Bennett, and In Sun Geoum, "Rational Bias in Macroeconomic Forecasts," Quarterly Journal of Economics 114, no. 1 (February 1999): 293-318.

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