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

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Author Info
Robert J. Tetlow () (Federal Reserve Board, Division of Research and Statistics, 20th and Constitution Avenue NW, Washington, D.C. 20551, United States.)
Brian Ironside () (Safeco Insurance Companies, Safeco Plaza, SPI Actuarial, T-14, Seattle, WA 98185-0001, United States.)

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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 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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Paper provided by European Central Bank in its series Working Paper Series with number 610.

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Length: 54 pages
Date of creation: Apr 2006
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Handle: RePEc:ecb:ecbwps:20060610

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Keywords: Monetary policy; uncertainty; real-time analysis.;

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