Forecast Rationality Tests in the Presence of Instabilities, With Applications to Federal Reserve and Survey Forecasts. Barbara Rossi and Tatevik Sekhposyany. June 8, 2014. Centre de Recerca en Economia Internacional.

“This paper proposes a framework to implement regression-based tests of predictive ability in unstable environments, including, in particular, forecast unbiasedness and efficiency tests, commonly referred to as tests of forecast rationality. Our framework is general: it can be applied to model-based forecasts obtained either with recursive or rolling window estimation schemes, as well as to forecasts that are model-free. The proposed tests provide more evidence against forecast rationality than previously found in the Federal Reserve is Greenbook forecasts as well as survey-based private forecasts. It confirms, however, that the Federal Reserve has additional information about current and future states of the economy relative to market participants.”