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Multivariate Forecast Errors and the Taylor Rule

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Author Info
Edward N. Gamber () (Department of Economics and Business, Lafayette College)
Tara M. Sinclair () (Department of Economics, George Washington University)
H.O. Stekler () (Department of Economics, George Washington University)
Elizabeth Reid () (Department of Economics, George Washington University)

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Abstract

This paper presents a new methodology to evaluate the impact of forecast errors on policy. We apply this methodology to the Federal Reserve forecasts of U.S. real output growth and the inflation rate using the Taylor (1993) monetary policy rule. Our results suggest it is possible to calculate policy forecast errors using joint predictions for a number of variables. These policy forecast errors have a direct interpretation for the impact of forecasts on policy. In the case of the Federal Reserve, we find that, on average, Fed policy based on the Taylor rule was approximately a full percentage point away from the intended target because of errors in forecasting growth and inflation.

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File URL: http://www.gwu.edu/~forcpgm/2008-002.pdf
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File Function: First version, 2008
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File URL: http://www.gwu.edu/~forcpgm/2008-002.pdf
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Publisher Info
Paper provided by The George Washinton University, Department of Economics, Research Program on Forecasting in its series Working Papers with number 2008-002.

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Length: 23 pages
Date of creation: Apr 2008
Date of revision: Aug 2008
Handle: RePEc:gwc:wpaper:2008-002

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Related research
Keywords: Forecast Evaluation; Federal Reserve Forecasts; Monetary Policy;

Find related papers by JEL classification:
C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Other Model Applications
E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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This page was last updated on 2009-12-10.

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