Finance and Economics Discussion Series (FEDS)
July 1997
Moving Endpoints and the Internal Consistency of Agents' Ex Ante Forecasts
Sharon Kozicki and P.A. Tinsley
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.
Full paper (517 KB Postscript)Keywords: Boundary values, expected inflation, term structure
PDF: Full Paper
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