Jointly Evaluating the Federal Reserve’s Forecasts of GDP Growth and Inflation
AbstractIn this paper we jointly evaluate the Federal Reserve staff forecasts of U.S. real output growth and the inflation rate assuming the forecasts are to be used as inputs for the Taylor rule. Our simple methodology generates “policy forecast errors” which have a direct interpretation for the impact of forecast errors on the target interest rate given by the Taylor rule. Without interest rate smoothing, we find that, on average, the Taylor rule target interest rate would have been approximately a full percentage point away from the intended target because of errors in forecasting output growth and inflation. Our results are robust to changes in the forecast horizon and to changes in the weights on the variables in the policy rule.
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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 2008-002.
Length: 13 pages
Date of creation: Apr 2008
Date of revision: Mar 2011
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Evaluating Forecasts; Macroeconomic Forecasts; Loss Function; Inflation Forecasting; GDP Growth Forecasting; Monetary Policy;
Find related papers by JEL classification:
- C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
- E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
- 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
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-ECM-2009-06-03 (Econometrics)
- NEP-FOR-2009-06-03 (Forecasting)
- NEP-MON-2009-06-03 (Monetary Economics)
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- Zisimos Koustas & Jean-Francois Lamarche, 2009.
"Instrumental variable estimation of a nonlinear Taylor rule,"
0909, Brock University, Department of Economics, revised Jul 2010.
- Zisimos Koustas & Jean-François Lamarche, 2012. "Instrumental variable estimation of a nonlinear Taylor rule," Empirical Economics, Springer, vol. 42(1), pages 1-20, February.
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