Bank supervision, commercial inflation forecasting and information asymmetry: new evidence for the U.S.A.

Abstract

This paper provides further evidence on the issue of the information asymmetry between the Federal Reserve Bank and commercial forecasters. Previous theoretical and empirical evidence suggest that in the absence of confidential supervisory information, commercial forecasters fail to capture the complete behaviour of economic variables. We test whether such information can improve commercial inflation forecasts during the period 1990:2 to 2000:2, using the change in the Federal Funds rate as a proxy for confidential information in the Fed's forecasts. Our findings confirm the presence and relevance of supervisory information in inflation forecasting. When the Fed receives information that results in contractionary policy, the results show commercial forecasts are generally below those of the Fed. This evidence is consistent with the main findings of earlier U.S. studies, supporting the existence of an informational advantage by the Fed and the generally accepted argument that the supervision of banks is central to central banking.