Are the Fed's inflation forecasts still superior to the private sector's?
AbstractWe examine the relative improvement in forecasting accuracy of the Federal Reserve (Greenbook forecasts) and private-sector forecasts (the Survey of Professional Forecasters and Blue Chip Economic Indicators)for inflation. Previous research by Romer and Romer [Romer, Christina, David, Romer, 2000. Federal reserve information and the behavior of interest rates. American Economic Review 90, 429-457], and Sims [Sims, Christopher, 2002. The role of models and probabilities in the monetary policy process. Brookings Papers on Economic Activity 2, 1-62] shows that the Fed is more accurate than the private sector at forecasting inflation. In a separate line of research, Atkeson and Ohanian [Andrew, Atkeson, Ohanian, Lee E., 2001. Are Phillips curves useful for forecasting inflation? Federal Reserve Bank of Minneapolis Quarterly Review 25, 2-11] and Stock and Watson [Stock, James, Watson, Mark, 2007. Why has U.S. inflation become harder to forecast? Journal of Money, Credit and Banking 39] document changes in the forecastability of inflation since the Great Moderation. These works suggest that the reduced inflation variability associated with the Great Moderation was mostly due to a decline in the variability of the predictable component inflation. We hypothesize that the decline in the variability of the predictable component of inflation has evened the playing field between the Fed and the private sector and therefore led to a narrowing, if not disappearance, of the Fed's relative forecasting advantage. We find that the Fed's forecast errors remain significantly smaller than the private sector's but the gap has narrowed considerable since the mid-1980s, especially after 1994.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Macroeconomics.
Volume (Year): 31 (2009)
Issue (Month): 2 (June)
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Web page: http://www.elsevier.com/locate/inca/622617
Forecasting inflation Survey of Professional Forecasters Blue Chip forecasts Greenbook forecasts Naive forecasts;
Other versions of this item:
- Edward N. Gamber & Julie K. Smith, 2007. "Are the Fed’s Inflation Forecasts Still Superior to the Private Sector’s?," Working Papers 2007-002, The George Washington University, Department of Economics, Research Program on Forecasting, revised Jul 2008.
- E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
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