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Moving Endpoints and the Internal Consistency Of Agents' Ex Ante ForecastsSharon Kozicki |
ABSTRACT Forecasts by rational agents contain embedded initial and terminal boundary conditions. Standard time series models generate two types of long-run "endpoints"--fixed endpoints and moving average endpoints. Neither can explain the shifting endpoints implied by postwar movements in the cross-section of forward rate forecasts in the term structure or by post-1979 changes in survey estimates of expected inflation. Multiperiod forecasts by a broader class of "moving endpoint" time series models provide substantially improved tracking of the historical term structure and generally support the internal consistency of the ex ante long-run expectations of bond traders and survey respondents. Keywords: Boundary values, expected inflation, term structure. Sharon Kozicki is a senior economist at the Federal Reserve Bank of Kansas City. P.A. Tinsley is Deputy Associate Director, Division of Research and Statistics, at the Board of Governors of the Federal Reserve System. The views expressed herein are solely those of the authors and do not necessarily reflect views of the Federal Reserve Bank of Kansas City or the Board of Governors of the Federal Reserve System. The paper is forthcoming in Computational Economics.Kozicki e-mail: sharon.kozicki@kc.frb.org
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