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Real-time model uncertainty in the United States: the Fed from 1996-2003

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  • Tetlow, Robert J.
  • Ironside, Brian

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 U.S. 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. JEL Classification: E37, E5, C5, C6

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 0610.

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Date of creation: Apr 2006
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Handle: RePEc:ecb:ecbwps:20060610

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

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Cited by:
  1. Martin Ellison & Thomas J. Sargent, 2012. "A Defense Of The Fomc," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 53(4), pages 1047-1065, November.
  2. Jacopo Cimadomo, 2007. "Fiscal Policy in Real Time," Working Papers 2007-10, CEPII research center.
  3. Kerstin Bernoth & Andrew Hughes Hallet & John Lewis, 2008. "Did fiscal policy makers know what they were doing? Reassessing fiscal policy with real-time data," DNB Working Papers 169, Netherlands Central Bank, Research Department.
  4. Faust, Jon & Wright, Jonathan H., 2008. "Efficient forecast tests for conditional policy forecasts," Journal of Econometrics, Elsevier, vol. 146(2), pages 293-303, October.

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