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Real-Time Model Uncertainty in the United States: the Fed from 1996-2003

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Author Info
Ironside, Brian
Tetlow, Robert J.

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Abstract

We study 30 vintages of FRB/US, the principal macro model used by the Federal Reserve Board staff for forecasting and policy analysis. To do this, we exploit archives of the model code, coefficients, baseline databases and stochastic shock sets stored after each FOMC meeting from the model’s inception in July 1996 until November 2003. The period of study was one of important changes in the US economy with a productivity boom, a stock market boom and bust, a recession, the Asia crisis, the Russian debt default, and an abrupt change in fiscal policy. We document the surprisingly large and consequential changes in model properties that occurred during this period and compute optimal Taylor-type rules for each vintage. We compare these optimal rules against plausible alternatives. Model uncertainty is shown to be a substantial problem; the efficacy of purportedly optimal policy rules should not be taken on faith. We also find that previous findings that simple rules are robust to model uncertainty may be an overly sanguine conclusion.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5305.

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Date of creation: Oct 2005
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Handle: RePEc:cpr:ceprdp:5305

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Related research
Keywords: monetary policy; real-time analysis; uncertainty;

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Find related papers by JEL classification:
C5 - Mathematical and Quantitative Methods - - Econometric Modeling
C6 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming
E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation
E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Jacopo Cimadomo, 2008. "Fiscal policy in real time," Working Paper Series 919, European Central Bank. [Downloadable!]
    Other versions:
  2. Martin Ellison & Thomas J. Sargent, 2009. "A defence of the FOMC," Economics Series Working Papers 457, University of Oxford, Department of Economics. [Downloadable!]
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