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

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Research Papers

Rational Bias in Macroeconomic Forecasts

July 1996 Number 9617

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

This paper develops a model of macroeconomic forecasting in which a forecaster's wage is a function of his accuracy as well as the publicity he generates for his firm by being correct. In the resulting Nash equilibrium, forecasters with identical models, information, and incentives nevertheless produce a variety of predictions, consciously biasing them in order to maximize 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 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.

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43 pages / 1,223 kb

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