Monetary Policy Lessons from the Greenbook

From 1987 through 2012, the Federal Open Market Committee appears to have set its federal funds rate target with reference to Greenbook forecasts of the output gap and inflation and to have made further adjustments to the funds rate as those forecasts were revised. If viewed in the context of the Taylor (1993) Rule, discretionary departures from the settings prescribed by a Greenbook forecast-based version of the rule consistently presage business cycle turning points. Similarly, estimates from an interest rate rule with time-varying parameters imply that, around such turning points, the FOMC responds less vigorously to information contained in Greenbook forecasts about the changing state of the economy. These results suggest possible gains from closer adherence to a rule with constant parameters. Other statistical properties of Greenbook forecasts also point to an overlooked role for monetary aggregates, particularly Divisia monetary aggregates, in the Federal Reserve's forecasting process and subsequent monetary policy decisions made by the FOMC.