The Federal Reserve tends to be overly optimistic about growth prospects when the economy is running below trend and overly pessimistic when it is above trend, according to a recent Fed working paper.
The Fed’s Asymmetric Forecast Errors, by Andrew Chang, assesses the Fed’s “greenbook” forecasts of the economy using conditional probabilities. Chang writes that conventional forecast testing methods, such as root mean squared error, can struggle to account for the “well known” psychological
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