Multivariate test for forecast rationality under asymmetric loss functions: Recent evidence from MMS survey of inflation–output forecasts

We propose a multivariate test for forecast rationality under asymmetric loss functions and test jointly the rationality of inflation–output forecasts of the MMS survey for the US. Our results indicate that even though the rationality of the forecasts individually may be rejected under two popular univariate asymmetric loss functions, Linlin and Linex, there is evidence that rationality of the joint forecasts of inflation and output cannot be rejected. We find that allowing for multivariate asymmetric loss functions does improve the evidence for rationality. ► MMS forecasts of US inflation and output not rational under symmetric loss. ► Assuming univariate loss causes inefficiencies and invalid inferences. ► PPI forecasts not rational under univariate Linlin/Linex asymmetric loss. ► IP forecasts rational under univariate asymmetric Linex loss. ► MMS inflation–output are jointly rational under multivariate asymmetric Linex loss.