Biases in Macroeconomic Forecasts: Irrationality or Asymmetric Loss?

Survey data on expectations frequently find evidence that forecasts are biased, rejecting the joint hypothesis of rational expectations and symmetric loss. While the literature has attempted to explain this bias through forecasters' strategic behavior, we propose a simpler explanation based on asymmetric loss. We establish that existing rationality tests are not robust to even small deviations from symmetry and hence have little ability to tell whether the forecaster is irrational or the loss function is asymmetric. We propose new and more general methods for testing forecast rationality jointly with flexible families of loss functions that embed quadratic loss as a special case. An empirical application to survey data on forecasts of nominal output growth shows strong evidence against rationality and symmetric loss. There is considerably weaker evidence against rationality once asymmetric loss is permittedrationality testing, forecasting, asymmetric loss