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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. 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.
  2. Michael Woodford, 2005. "Central-bank communication and policy effectiveness," Discussion Papers 0506-07, Columbia University, Department of Economics.
  3. John C. Robertson & Ellis W. Tallman, 1999. "Vector autoregressions: forecasting and reality," Economic Review, Federal Reserve Bank of Atlanta, issue Q1, pages 4-18.
  4. Christopher A. Sims & Tao Zha, 2004. "Were there regime switches in U.S. monetary policy?," Working Paper 2004-14, Federal Reserve Bank of Atlanta.
  5. 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.
  6. John C. Robertson & Ellis W. Tallman, 1999. "Improving forecasts of the federal funds rate in a policy model," Working Paper 99-3, Federal Reserve Bank of Atlanta.
  7. 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.
  8. 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.).
  9. repec:wop:humbsf:1999-4 is not listed on IDEAS
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Cited by:
  1. Michael Ehrmann & Sylvester Eijffinger & Marcel Fratzscher, 2012. "The Role of Central Bank Transparency for Guiding Private Sector Forecasts," Scandinavian Journal of Economics, Wiley Blackwell, vol. 114(3), pages 1018-1052, 09.
  2. Menno Middeldorp, 2011. "Central bank transparency, the accuracy of professional forecasts, and interest rate volatility," Staff Reports 496, Federal Reserve Bank of New York.
  3. Carin van der Cruijsen & Sylvester Eijffinger, 2007. "The economic impact of central bank transparency: a survey," DNB Working Papers 132, Netherlands Central Bank, Research Department.
  4. 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.
  5. Berger, Helge & Ehrmann, Michael & Fratzscher, Marcel, 2006. "Geography or skills: What explains Fed watchers’ forecast accuracy of US monetary policy?," Working Paper Series 0695, European Central Bank.
  6. 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).
  7. 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).
  8. 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).
  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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