Assessing the prudence of economic forecasts in the EU

We estimate the EU Commission loss preferences for major economic forecasts of 12 Member States. Based on a recently proposed method by Elliott, Komunjer and Timmermann (2005) the paper provides evidence of asymmetries in the underlying forecast loss preference of the Commission that tend to vary across Member States. In some cases, our results show that EU forecasts tend to display a rather optimistic picture for main economic variables, e.g. government balance, thus allowing a certain degree of leeway in the fiscal adjustment path towards the medium-term objective of 'close to balance' or 'in surplus' of the recently revised Stability and Growth Pact. Over the period of our sample, 1970-2004, this apparent asymmetry in the underlying loss preferences tends to deter prudent advice over economic policy. Lastly, we provide an analysis on the trade-off between loss and distribution asymmetries, for which simulation results show that the testing method is robust in the presence of skewness. © 2009 John Wiley & Sons, Ltd.