Abstract:
Using forecasts of the inflation rate in South Africa, we study the rationality of forecasts and
the shape of forecasters’ loss functions. When we study micro-level data of individual
forecasts, we
find mixed evidence of an asymmetric loss function, suggesting that inflation
forecasters are heterogeneous with respect to the shape of their loss functions. We also
find
strong evidence that inflation forecasts are in line with forecast rationality. When we pool
the data and study sectoral inflation forecasts of
financial analysts, trade unions and the
business sector, we
find evidence for asymmetry in the loss function and against forecast
rationality. Upon comparing the micro-level results with those for pooled and sectoral data,
we conclude that forecast rationality should be assessed based on micro-level data, and
that freer access to this data would allow a more rigorous analysis and discussion of the
information content of the surveys.
