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Transparency, expectations and forecasts

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Author Info

  • Andrew Bauer
  • Robert A. Eisenbeis
  • Daniel F. Waggoner
  • Tao Zha

Abstract

Many economists believe that a central bank’s transparency about its objectives, economic outlook, and policy changes affect the public’s views about future economic and financial conditions. In keeping with this theory, since 1994 the Federal Open Market Committee has gradually increased the transparency of its statements accompanying changes in the federal funds rate target. ; This article investigates whether private agents’ ability to predict the economy’s direction has improved since 1994. The analysis focuses on forecasts of macroeconomic variables such as inflation, gross domestic product growth, and unemployment and policy variables such as short-term interest rates. Private agents’ current-year and next-year forecasts in the monthly Blue Chip Economic Indicators surveys from 1986 to 2004 serve as proxies for the public’s short-term and longer-term expectations. ; The econometric methodology decomposes forecast accuracy into two components: the common error that affects all individual participants and the idiosyncratic error that reflects discrepant views among individuals. The analysis indicates that idiosyncratic errors have steadily declined and individuals’ forecasts have been more synchronized since 1994 while common forecast errors—likely associated with business cycles and other economic shocks—have been largely unaffected. ; Although these findings show little evidence that transparent monetary policy enhances the public’s ability to predict business cycles, the authors note that the data sample may not be long enough to reveal such effects.

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Bibliographic Info

Article provided by Federal Reserve Bank of Atlanta in its journal Economic Review.

Volume (Year): (2006)
Issue (Month): Q 1 ()
Pages: 1-25

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Handle: RePEc:fip:fedaer:y:2006:i:q1:p:1-25:n:v.91no.1

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Keywords: Federal Open Market Committee ; Economic forecasting;

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References

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  1. Michael Woodford, 2005. "Central-bank communication and policy effectiveness," Discussion Papers 0506-07, Columbia University, Department of Economics.
  2. Andy Bauer & Robert A. Eisenbeis & Daniel F. Waggoner & Tao Zha, 2003. "Forecast evaluation with cross-sectional data: The Blue Chip Surveys," Economic Review, Federal Reserve Bank of Atlanta, issue Q2, pages 17-31.
  3. Donald L. Kohn & Brian P. Sack, 2003. "Central bank talk: does it matter and why?," Finance and Economics Discussion Series 2003-55, Board of Governors of the Federal Reserve System (U.S.).
  4. Christopher A. Sims & Tao Zha, 2005. "Were There Regime Switches in U.S. Monetary Policy?," Working Papers 92, Princeton University, Department of Economics, Center for Economic Policy Studies..
  5. repec:wop:humbsf:1999-4 is not listed on IDEAS
  6. Robertson, John C & Tallman, Ellis W, 2001. "Improving Federal-Funds Rate Forecasts in VAR Models Used for Policy Analysis," Journal of Business & Economic Statistics, American Statistical Association, vol. 19(3), pages 324-30, July.
  7. John C. Robertson & Ellis W. Tallman, 1999. "Vector autoregressions: forecasting and reality," Economic Review, Federal Reserve Bank of Atlanta, issue Q1, pages 4-18.
  8. Robert Eisenbeis & Daniel Waggoner & Tao Zha, 2002. "Evaluating Wall Street Journal survey forecasters: a multivariate approach," Working Paper 2002-8, Federal Reserve Bank of Atlanta.
  9. 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.
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Citations

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Cited by:
  1. Ehrmann, Michael & Eijffinger, Sylvester & Fratzscher, Marcel, 2010. "The role of central bank transparency for guiding private sector forecasts," Working Paper Series 1146, European Central Bank.
  2. Paul Hubert, 2011. "Central Bank Forecasts as an Instrument of Monetary Policy," Documents de Travail de l'OFCE 2011-23, Observatoire Francais des Conjonctures Economiques (OFCE).
  3. Berger, Helge & Ehrmann, Michael & Fratzscher, Marcel, 2011. "Geography, skills or both: What explains Fed watchers' forecast accuracy of US monetary policy?," Journal of Macroeconomics, Elsevier, vol. 33(3), pages 420-437, September.
  4. Menno Middeldorp, 2011. "Central bank transparency, the accuracy of professional forecasts, and interest rate volatility," Staff Reports 496, Federal Reserve Bank of New York.
  5. Eijffinger, Sylvester C W & van der Cruijsen, Carin A B, 2007. "The Economic Impact of Central Bank Transparency: A Survey," CEPR Discussion Papers 6070, C.E.P.R. Discussion Papers.
  6. Paul Hubert, 2013. "FOMC forecasts as a focal point for private expectations," Documents de Travail de l'OFCE 2013-12, Observatoire Francais des Conjonctures Economiques (OFCE).
  7. Colarossi, Silvio & Zaghini, Andrea, 2007. "Gradualism, transparency and improved operational framework: A look at the overnight volatility transmission," CFS Working Paper Series 2007/16, Center for Financial Studies (CFS).
  8. Berger, Helge & Ehrmann, Michael & Fratzscher, Marcel, 2008. "Geography or skills: what explains Fed Wachters' forecast accuracy of US monetary policy?," Discussion Papers 2008/11, Free University Berlin, School of Business & Economics.
  9. Silvio Colarossi & Andrea Zaghini, 2009. "Gradualism, transparency and the improved operational framework: a look at the overnight volatility transmission," Temi di discussione (Economic working papers) 710, Bank of Italy, Economic Research and International Relations Area.

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