Are the Fed’s Inflation Forecasts Still Superior to the Private Sector’s?
AbstractWe examine the relative improvement in forecasting accuracy of the Federal Reserve (Greenbook forecasts) and private-sector forecasts (the Survey of Professional Forecasters and Blue Chip Economic Indicators) for inflation. Previous research by Romer and Romer (2000), and Sims (2002) shows that the Fed is more accurate than the private sector at forecasting inflation. In a separate line of research, Atkeson and Ohanian (2001) and Stock and Watson (2007) document changes in the forecastability of inflation since the Great Moderation. These works suggest that the reduced inflation variability associated with Great Moderation was mostly due to a decline in the variability of the predictable component inflation. We hypothesize that the decline in the variability of the predictable component of inflation has evened the playing field between the Fed and private sector and therefore led to a narrowing, if not disappearance, of the Fed’s relative forecasting advantage. We find that the Fed’s forecast errors remain significantly smaller than the private sector’s but the gap has narrowed considerable since the mid-1980s, especially after 1994.
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Bibliographic InfoPaper provided by The George Washington University, Department of Economics, Research Program on Forecasting in its series Working Papers with number 2007-002.
Length: 29 pages
Date of creation: Nov 2007
Date of revision: Jul 2008
Publication status: Forthcoming in the Journal of Macroeconomics
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forecasting inflation; Survey of Professional Forecasters; Blue Chip forecasts; Greenbook forecasts; naïve forecasts;
Find related papers by JEL classification:
- E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-06-03 (All new papers)
- NEP-CBA-2009-06-03 (Central Banking)
- NEP-FOR-2009-06-03 (Forecasting)
- NEP-MAC-2009-06-03 (Macroeconomics)
- NEP-MON-2009-06-03 (Monetary Economics)
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