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Jointly evaluating the Federal Reserve’s forecasts of GDP growth and inflation

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Author Info

  • Sinclair, Tara M.
  • Gamber, Edward N.
  • Stekler, Herman
  • Reid, Elizabeth

Abstract

In this paper we jointly evaluate the Federal Reserve staff forecasts of U.S. real output growth and the inflation rate, assuming that the forecasts are to be used as inputs for the Taylor rule. Our simple methodology generates “policy forecast errors” which have a direct interpretation for the impact of forecast errors on the target interest rate given by the Taylor rule. Without interest rate smoothing, we find that, on average, the Taylor rule target interest rate would have been approximately a full percentage point away from the intended target because of errors in forecasting output growth and inflation. Our results are robust to changes in the forecast horizon and to changes in the weights on the variables in the policy rule.

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Bibliographic Info

Article provided by Elsevier in its journal International Journal of Forecasting.

Volume (Year): 28 (2012)
Issue (Month): 2 ()
Pages: 309-314

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Handle: RePEc:eee:intfor:v:28:y:2012:i:2:p:309-314

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Web page: http://www.elsevier.com/locate/ijforecast

Related research

Keywords: Multivariate forecasts; Taylor rule; Monetary policy; Loss function; Policy forecast errors; Greenbook;

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References

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Citations

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Cited by:
  1. Tara M. Sinclair & H.O. Stekler & Warren Carnow, 2012. "A New Approach For Evaluating Economic Forecasts," Working Papers 2012-004, The George Washington University, Department of Economics, Research Program on Forecasting.
  2. Zisimos Koustas & Jean-Francois Lamarche, 2009. "Instrumental variable estimation of a nonlinear Taylor rule," Working Papers 0909, Brock University, Department of Economics, revised Jul 2010.
  3. Bel, K. & Paap, R., 2013. "Modeling the impact of forecast-based regime switches on macroeconomic time series," Econometric Institute Research Papers EI 2013-25, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.

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