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Are the Fed's inflation forecasts still superior to the private sector's?

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Author Info

  • Gamber, Edward N.
  • Smith, Julie K.

Abstract

We 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 Info

Article provided by Elsevier in its journal Journal of Macroeconomics.

Volume (Year): 31 (2009)
Issue (Month): 2 (June)
Pages: 240-251

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Handle: RePEc:eee:jmacro:v:31:y:2009:i:2:p:240-251

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Web page: http://www.elsevier.com/locate/inca/622617

Related research

Keywords: Forecasting inflation Survey of Professional Forecasters Blue Chip forecasts Greenbook forecasts Naive forecasts;

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References

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  1. James H. Stock & Mark W. Watson, 2007. "Why Has U.S. Inflation Become Harder to Forecast?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(s1), pages 3-33, 02.
  2. Christina D. Romer & David H. Romer, 2008. "The FOMC versus the Staff: Where Can Monetary Policymakers Add Value?," American Economic Review, American Economic Association, vol. 98(2), pages 230-35, May.
  3. Chang-Jin Kim & Charles Nelson & Jeremy Piger, 2001. "The less volatile U.S. economy: a Bayesian investigation of timing, breadth, and potential explanations," International Finance Discussion Papers 707, Board of Governors of the Federal Reserve System (U.S.).
  4. D’Agostino, Antonello & Giannone, Domenico & Surico, Paolo, 2006. "(Un)Predictability and macroeconomic stability," Working Paper Series 0605, European Central Bank.
  5. Fair, Ray C & Shiller, Robert J, 1989. "The Informational Context of Ex Ante Forecasts," The Review of Economics and Statistics, MIT Press, vol. 71(2), pages 325-31, May.
  6. Margaret McConnell & Gabriel Perez Quiros, 2000. "Output fluctuations in the United States: what has changed since the early 1980s?," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
  7. James H. Stock & Mark W. Watson, 2002. "Has the Business Cycle Changed and Why?," NBER Working Papers 9127, National Bureau of Economic Research, Inc.
  8. Christopher A. Sims, 2002. "The Role of Models and Probabilities in the Monetary Policy Process," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 33(2), pages 1-62.
  9. Jon Faust & Jonathan H. Wright, 2007. "Comparing Greenbook and Reduced Form Forecasts using a Large Realtime Dataset," NBER Working Papers 13397, National Bureau of Economic Research, Inc.
  10. Harvey, David & Leybourne, Stephen & Newbold, Paul, 1997. "Testing the equality of prediction mean squared errors," International Journal of Forecasting, Elsevier, vol. 13(2), pages 281-291, June.
  11. David Reifschneider & Peter Tulip, 2007. "Gauging the uncertainty of the economic outlook from historical forecasting errors," Finance and Economics Discussion Series 2007-60, Board of Governors of the Federal Reserve System (U.S.).
  12. Andrew Atkeson & Lee E. Ohanian., 2001. "Are Phillips curves useful for forecasting inflation?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 2-11.
  13. Cukierman, Alex, 2007. "The Limits of Transparency," CEPR Discussion Papers 6475, C.E.P.R. Discussion Papers.
  14. Olivier Blanchard & John Simon, 2001. "The Long and Large Decline in U.S. Output Volatility," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 32(1), pages 135-174.
  15. James H. Stock & Mark W. Watson, 2003. "Has the business cycle changed?," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 9-56.
  16. 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.
  17. David H. Romer & Christina D. Romer, 2000. "Federal Reserve Information and the Behavior of Interest Rates," American Economic Review, American Economic Association, vol. 90(3), pages 429-457, June.
  18. 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.
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Citations

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Cited by:
  1. Kishor N. Kundan, 2010. "The Superiority of Greenbook Forecasts and the Role of Recessions," National Bank of Poland Working Papers 74, National Bank of Poland, Economic Institute.
  2. Makram El-Shagi & Sebastian Giesen & A. Jung, 2012. "Does Central Bank Staff Beat Private Forecasters?," IWH Discussion Papers 5, Halle Institute for Economic Research.
  3. João Valle e Azevedo & João Tovar Jalles, 2011. "Rational vs. Professional Forecasts," Working Papers w201114, Banco de Portugal, Economics and Research Department.
  4. El-Shagi, Makram & Giesen, Sebastian & Jung, Alexander, 2014. "Does the federal reserve staff still beat private forecasters?," Working Paper Series 1635, European Central Bank.
  5. Ellis, Michael A. & Liu, Dandan, 2013. "Do FOMC forecasts add value to staff forecasts?," European Journal of Political Economy, Elsevier, vol. 32(C), pages 332-340.
  6. Paul Hubert, 2011. "Do central banks forecast influence private agents ? Forecasting performance vs. signals," Documents de Travail de l'OFCE 2011-20, Observatoire Francais des Conjonctures Economiques (OFCE).
  7. Liu, Dandan & Smith, Julie K., 2014. "Inflation forecasts and core inflation measures: Where is the information on future inflation?," The Quarterly Review of Economics and Finance, Elsevier, vol. 54(1), pages 133-137.
  8. Henning Fischer & Marta García-Bárzana & Peter Tillmann & Peter Winker, 2012. "Evaluating FOMC forecast ranges: an interval data approach," MAGKS Papers on Economics 201213, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
  9. Paul Hubert, 2010. "Monetary Policy, Imperfect Information and the Expectations Channel," Sciences Po publications info:hdl:2441/f4rshpf3v1u, Sciences Po.
  10. B. Onur Tas, 2012. "Federal Reserve Private Information in Forecasting Interest Rates," Working Papers 1206, TOBB University of Economics and Technology, Department of Economics.
  11. Jakob de Haan & David-Jan Jansen, 2009. "The communication policy of the European Central Bank: An overview of the first decade," DNB Working Papers 212, Netherlands Central Bank, Research Department.

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