Forecast Optimality Tests in the Presence of Instabilities

This paper proposes forecast optimality tests that can be used in unstable environments. They include tests for forecast unbiasedness, efficiency, encompassing, serial uncorrelation, and, in general, regression-based tests of forecasting ability. The proposed tests are applied to evaluate the rationality of the Federal Reserve Greenbook forecasts as well as a variety of survey-based private forecasts. In addition, we consider whether Money Market Services forecasts are rational. Our robust tests suggest more empirical evidence against forecast rationality than previously found but con…firm that the Federal Reserve has additional information about current and future states of the economy relative to market participants.