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Forecast errors before and during the Great Moderation

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Author Info

  • Gamber, Edward N.
  • Smith, Julie K.
  • Weiss, Matthew A.

Abstract

This paper investigates the change in private sector and Federal Reserve forecasts before and during the Great Moderation. We view the Great Moderation as a natural experiment. Using forecasts produced by the Survey of Professional Forecasters and the Federal Reserve (Greenbook forecasts) we investigate three questions: (1) How large was the decline in forecast errors? (2) Did forecast accuracy improve relative to the decline in volatility of growth and inflation? (3) Did forecasters respond to the Great Moderation? We find that the absolute median error as well as the cross-sectional volatility of forecast errors decreased significantly. Forecasters appeared to have narrowed the dispersion of their forecasts in response to the Great Moderation. Forecast accuracy did not improve relative to the reduction in the volatility of the economy.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economics and Business.

Volume (Year): 63 (2011)
Issue (Month): 4 (July)
Pages: 278-289

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Handle: RePEc:eee:jebusi:v:63:y:2011:i:4:p:278-289

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

Related research

Keywords: Great Moderation Survey of Professional Forecasters Forecast errors;

References

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  1. James H. Stock & Mark W. Watson, 2003. "Understanding Changes in International Business Cycle Dynamics," NBER Working Papers 9859, National Bureau of Economic Research, Inc.
  2. Todd E. Clark, 2009. "Is the Great Moderation over? an empirical analysis," Economic Review, Federal Reserve Bank of Kansas City, issue Q IV, pages 5-42.
  3. Daniel J. Vine & Valerie A. Ramey, 2006. "Declining Volatility in the U.S. Automobile Industry," American Economic Review, American Economic Association, vol. 96(5), pages 1876-1889, December.
  4. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 33(1), pages 125-132.
  5. Cristina Betancour & Jose De Gregorio & Juan Pablo Medina, 2006. "The “Great Moderation” and the Monetary Transmission Mechanism in Chile," Working Papers Central Bank of Chile 393, Central Bank of Chile.
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  7. Gabriel Perez-Quiros & Margaret M. McConnell, 2000. "Output Fluctuations in the United States: What Has Changed since the Early 1980's?," American Economic Review, American Economic Association, vol. 90(5), pages 1464-1476, December.
  8. James H. Stock & Mark W. Watson, 2007. "Erratum to "Why Has U.S. Inflation Become Harder to Forecast?"," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(7), pages 1849-1849, October.
  9. Bruce E. Hansen, 1998. "Testing for Structural Change in Conditional Models," Boston College Working Papers in Economics 310., Boston College Department of Economics.
  10. Dean Croushore & Tom Stark, 1999. "A real-time data set for macroeconomists," Working Papers 99-4, Federal Reserve Bank of Philadelphia.
  11. Mankiw, N. Gregory & Campbell, John, 1987. "Permanent and Transitory Components in Macroeconomic Fluctuations," Scholarly Articles 3207697, Harvard University Department of Economics.
  12. James A. Kahn & Margaret M. McConnell & Gabriel Perez-Quiros, 2002. "On the causes of the increased stability of the U.S. economy," Economic Policy Review, Federal Reserve Bank of New York, issue May, pages 183-202.
  13. Peter M. Summers, 2005. "What caused the Great Moderation? : some cross-country evidence," Economic Review, Federal Reserve Bank of Kansas City, issue Q III, pages 5-32.
  14. James H. Stock & Mark W. Watson, 2006. "Why Has U.S. Inflation Become Harder to Forecast?," NBER Working Papers 12324, National Bureau of Economic Research, Inc.
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