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Can the Fed Predict the State of the Economy?

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  • Tara M. Sinclair

    ()
    (Department of Economics The George Washington University)

  • Fred Joutz

    ()
    (Department of Economics The George Washington University)

  • Herman O. Stekler

    ()
    (Department of Economics The George Washington University)

Abstract

Recent research has documented that the Federal Reserve produces systematic errors in forecasting inflation, real GDP growth, and the unemployment rate, even though these forecasts are unbiased. We show that these systematic errors reveal that the Fed is “surprised” by real and inflationary cycles. Using a modified Mincer-Zarnowitz regression, we show that the Fed knows the state of the economy for the current quarter, but cannot predict it one quarter ahead.

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File URL: http://www.gwu.edu/~forcpgm/2009-001.pdf
File Function: First version, 2009
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Bibliographic Info

Paper provided by The George Washington University, Department of Economics, Research Program on Forecasting in its series Working Papers with number 2009-001.

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Length: 10 pages
Date of creation: Jun 2009
Date of revision: Mar 2010
Handle: RePEc:gwc:wpaper:2009-001

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Keywords: Forecast Evaluation; Federal Reserve; Systematic Errors; Recessions;

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References

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  1. Carlos Capistrán, 2006. "Bias in Federal Reserve Inflation Forecasts: Is the Federal Reserve Irrational or Just Cautious?," Working Papers, Banco de México 2006-14, Banco de México.
  2. Swanson, Norman R. & van Dijk, Dick, 2006. "Are Statistical Reporting Agencies Getting It Right? Data Rationality and Business Cycle Asymmetry," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 24, pages 24-42, January.
  3. Graham Elliott & Ivana Komunjer & Allan Timmermann, 2005. "Biases In Macroeconomic Forecasts: Irrationality Or Asymmetric Loss?," CAMA Working Papers 2005-14, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  4. Karen E. Dynan & Douglas Elmendorf, 2001. "Do provisional estimates of output miss economic turning points?," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2001-52, Board of Governors of the Federal Reserve System (U.S.).
  5. Jacob A. Mincer & Victor Zarnowitz, 1969. "The Evaluation of Economic Forecasts," NBER Chapters, National Bureau of Economic Research, Inc, in: Economic Forecasts and Expectations: Analysis of Forecasting Behavior and Performance, pages 1-46 National Bureau of Economic Research, Inc.
  6. Holden, K & Peel, D A, 1990. "On Testing for Unbiasedness and Efficiency of Forecasts," The Manchester School of Economic & Social Studies, University of Manchester, University of Manchester, vol. 58(2), pages 120-27, June.
  7. Joutz, Fred & Stekler, H. O., 2000. "An evaluation of the predictions of the Federal Reserve," International Journal of Forecasting, Elsevier, Elsevier, vol. 16(1), pages 17-38.
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Citations

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Cited by:
  1. Tara M. Sinclair & H.O. Stekler, 2011. "Examining the Quality of Early GDP Component Estimates," Working Papers, The George Washington University, Department of Economics, Research Program on Forecasting 2011-001, The George Washington University, Department of Economics, Research Program on Forecasting, revised Dec 2011.
  2. Tara M. Sinclair & H. O. Stekler & Warren Carnow, 2012. "A new approach for evaluating economic forecasts," Economics Bulletin, AccessEcon, vol. 32(3), pages 2332-2342.
  3. Henning Fischer & Marta García-Bárzana & Peter Tillmann & Peter Winker, 2014. "Evaluating FOMC forecast ranges: an interval data approach," Empirical Economics, Springer, Springer, vol. 47(1), pages 365-388, August.
  4. Loungani, Prakash & Stekler, Herman & Tamirisa, Natalia, 2013. "Information rigidity in growth forecasts: Some cross-country evidence," International Journal of Forecasting, Elsevier, Elsevier, vol. 29(4), pages 605-621.
  5. Tara M. Sinclair & H.O. Stekler, 2011. "Differences in Early GDP Component Estimates Between Recession and Expansion," Working Papers, The George Washington University, Institute for International Economic Policy 2011-05, The George Washington University, Institute for International Economic Policy.
  6. Tara Sinclair & Herman O. Stekler & Warren Carrow, 2012. "Evaluating a Vector of the Fed's Forecasts," Working Papers, The George Washington University, Institute for International Economic Policy 2012-3, The George Washington University, Institute for International Economic Policy.
  7. Tara M. Sinclair, 2012. "Characteristics and Implications of Chinese Macroeconomic Data Revisions," Working Papers, The George Washington University, Institute for International Economic Policy 2012-09, The George Washington University, Institute for International Economic Policy.

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