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Evaluating FOMC forecast ranges: an interval data approach

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Author Info

  • Henning Fischer

    ()
    (University of Giessen)

  • Marta García-Bárzana

    ()
    (University of Oviedo)

  • Peter Tillmann

    ()
    (University of Giessen)

  • Peter Winker

    ()
    (University of Giessen)

Abstract

The Federal Open Market Committee (FOMC) of the U.S. Federal Reserve publishes the range of members’ forecasts for key macroeconomic variables, but not the distribution of forecasts within this range. To evaluate these projections, previous papers compare the midpoint of the ranges with the realized outcome. This paper proposes a new approach to forecast evaluation that takes account of the interval nature of projections. It is shown that using the conventional Mincer-Zarnowitz approach to evaluate FOMC forecasts misses important information contained in the width of the forecast interval. This additional information plays a minor role at short forecast horizons but turns out to be of crucial importance for inflation and unemployment forecasts 18 months into the future. At long horizons the variation of members’ projections contains information which is more relevant for explaining future inflation than information embodied in the midpoint.

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File URL: https://www.uni-marburg.de/fb02/makro/forschung/magkspapers/13-2012_tillmann.pdf
File Function: First version, 2012
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Bibliographic Info

Paper provided by Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung) in its series MAGKS Papers on Economics with number 201213.

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Length: 16 pages
Date of creation: 2012
Date of revision:
Publication status: Forthcoming in
Handle: RePEc:mar:magkse:201213

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Keywords: Forecast evaluation; interval data; Federal Reserve; monetary policy;

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  1. Gamber, Edward N. & Smith, Julie K., 2009. "Are the Fed's inflation forecasts still superior to the private sector's?," Journal of Macroeconomics, Elsevier, vol. 31(2), pages 240-251, June.
  2. William T. Gavin, 2003. "FOMC forecast: is all the information in the central tendency?," Review, Federal Reserve Bank of St. Louis, issue May, pages 27-46.
  3. Carlos Capistrán, 2006. "Bias in Federal Reserve Inflation Forecasts: Is the Federal Reserve Irrational or Just Cautious?," Working Papers 2006-14, Banco de México.
  4. Giordani, Paolo & Soderlind, Paul, 2003. "Inflation forecast uncertainty," European Economic Review, Elsevier, vol. 47(6), pages 1037-1059, December.
  5. Kajal Lahiri & Xuguang Sheng, 2010. "Measuring forecast uncertainty by disagreement: The missing link," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 25(4), pages 514-538.
  6. Christian Kascha & Francesco Ravazzolo, 2010. "Combining inflation density forecasts," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 29(1-2), pages 231-250.
  7. Whitney K. Newey & Kenneth D. West, 1986. "A Simple, Positive Semi-Definite, Heteroskedasticity and AutocorrelationConsistent Covariance Matrix," NBER Technical Working Papers 0055, National Bureau of Economic Research, Inc.
  8. David H. Romer & Christina D. Romer, 2000. "Federal Reserve Information and the Behavior of Interest Rates," American Economic Review, American Economic Association, vol. 90(3), pages 429-457, June.
  9. Michael W. McCracken, 2010. "Using FOMC forecasts to forecast the economy," Economic Synopses, Federal Reserve Bank of St. Louis.
  10. Gavin, William T. & Mandal, Rachel J., 2003. "Evaluating FOMC forecasts," International Journal of Forecasting, Elsevier, vol. 19(4), pages 655-667.
  11. D'Agostino, Antonello & Whelan, Karl, 2007. "Federal Reserve Information During the Great Moderation," Research Technical Papers 8/RT/07, Central Bank of Ireland.
  12. Tara Sinclair & Frederick L. Joutz, 2009. "Can the Fed Predict the State of the Economy?," Working Papers 2008-06, The George Washington University, Institute for International Economic Policy.
  13. Carlos Capistrán & Allan Timmermann, 2009. "Disagreement and Biases in Inflation Expectations," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(2-3), pages 365-396, 03.
  14. David Romer, 2010. "A New Data Set on Monetary Policy: The Economic Forecasts of Individual Members of the FOMC," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(5), pages 951-957, 08.
  15. Chong, Yock Y & Hendry, David F, 1986. "Econometric Evaluation of Linear Macro-Economic Models," Review of Economic Studies, Wiley Blackwell, vol. 53(4), pages 671-90, August.
  16. Christopher A. Sims, 2002. "The Role of Models and Probabilities in the Monetary Policy Process," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 33(2), pages 1-62.
  17. Chanont Banternghansa & Michael W. McCracken, 2009. "Forecast disagreement among FOMC members," Working Papers 2009-059, Federal Reserve Bank of St. Louis.
  18. Wieland, Volker & Wolters, Maik Hendrik, 2012. "Forecasting and policy making," IMFS Working Paper Series 62, Institute for Monetary and Financial Stability (IMFS), Goethe University Frankfurt.
  19. Tillmann, Peter, 2011. "Strategic forecasting on the FOMC," European Journal of Political Economy, Elsevier, vol. 27(3), pages 547-553, September.
  20. Blanco-Fernández, Angela & Corral, Norberto & González-Rodríguez, Gil, 2011. "Estimation of a flexible simple linear model for interval data based on set arithmetic," Computational Statistics & Data Analysis, Elsevier, vol. 55(9), pages 2568-2578, September.
  21. William T. Gavin & Geetanjali Pande, 2008. "FOMC consensus forecasts," Review, Federal Reserve Bank of St. Louis, issue May, pages 149-164.
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Cited by:
  1. Bratu, Mihaela, 2013. "The Assessment And Improvement Of The Accuracy For The Forecast Intervals," Working Papers of Macroeconomic Modelling Seminar 132602, Institute for Economic Forecasting.
  2. repec:ntu:ntugeo:vol2-iss1-14-054 is not listed on IDEAS
  3. Mihaela Simionescu, 2014. "M1 and M2 indicators- new proposed measures for the global accuracy of forecast intervals," Computational Methods in Social Sciences (CMSS), "Nicolae Titulescu" University of Bucharest, Faculty of Economic Sciences, vol. 2(1), pages 54-59, June.

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