Rational Bias in Macroeconomic Forecasts

46 Pages Posted: 22 Jun 2007

See all articles by David Laster

David Laster

Swiss Re Economic Research & Consulting

Paul B. Bennett

Fordham University Business School

In Suk Geoum

Morgan Stanley

Multiple version iconThere are 2 versions of this paper

Date Written: March 1997

Abstract

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.

Keywords: macroeconomic forecasting, incentives, wages

JEL Classification: D84, E17, L86

Suggested Citation

Laster, David and Bennett, Paul B. and Geoum, In Suk, Rational Bias in Macroeconomic Forecasts (March 1997). FRB of New York Staff Report No. 21, Available at SSRN: https://ssrn.com/abstract=993826 or http://dx.doi.org/10.2139/ssrn.993826

David Laster

Swiss Re Economic Research & Consulting ( email )

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Paul B. Bennett (Contact Author)

Fordham University Business School ( email )

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HOME PAGE: http://business.fordham.edu/faculty/bennett

In Suk Geoum

Morgan Stanley ( email )

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