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(Un)Predictability and macroeconomic stability

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Abstract

This paper documents a new stylized fact of the greater macroeconomic stability of the U.S. economy over the last two decades. Using 131 monthly time series, three popular statistical methods and the forecasts of the Federal Reserve’s Greenbook and the Survey of Professional Forecasters, we show that the ability to predict several measures of inflation and real activity declined remarkably, relative to naive forecasts, since the mid-1980s. This break down in forecast ability appears to be an inherent feature of the most recent period and thus represents a new challenge for competing explanations of the ‘Great Moderation’. JEL Classification: E37; E47; C22; C53.

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 605.

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Length: 41 pages
Date of creation: Apr 2006
Date of revision:
Handle: RePEc:ecb:ecbwps:20060605

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Keywords: Predictive accuracy; macroeconomic stability; forecasting models; sub-sample analysis; Fed Greenbook.;

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References

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  19. Shaghil Ahmed & Andrew Levin & Beth Anne Wilson, 2004. "Recent U.S. Macroeconomic Stability: Good Policies, Good Practices, or Good Luck?," The Review of Economics and Statistics, MIT Press, vol. 86(3), pages 824-832, August.
  20. James H. Stock & Mark W. Watson, 2003. "Has the business cycle changed?," Proceedings, Federal Reserve Bank of Kansas City, pages 9-56.
  21. 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.
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