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Evaluating FOMC forecast ranges: an interval data approach

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  • 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. Söderlind, Paul, 2000. "Inflation Forecast Uncertainty," CEPR Discussion Papers 2499, C.E.P.R. Discussion Papers.
  2. Sinclair, Tara M. & Joutz, Fred & Stekler, H.O., 2010. "Can the Fed predict the state of the economy?," Economics Letters, Elsevier, vol. 108(1), pages 28-32, July.
  3. 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.
  4. 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.
  5. William T. Gavin & Rachel J. Mandal, 2002. "Evaluating FOMC forecasts," Working Papers 2001-005, Federal Reserve Bank of St. Louis.
  6. 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.
  7. D'Agostino, Antonello & Whelan, Karl, 2007. "Federal Reserve Information During the Great Moderation," Research Technical Papers 8/RT/07, Central Bank of Ireland.
  8. Peter Tillmann, 2010. "Strategic Forecasting on the FOMC," MAGKS Papers on Economics 201017, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
  9. Capistrán, Carlos, 2008. "Bias in Federal Reserve inflation forecasts: Is the Federal Reserve irrational or just cautious?," Journal of Monetary Economics, Elsevier, vol. 55(8), pages 1415-1427, November.
  10. 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.
  11. William T. Gavin, 2003. "FOMC forecasts: is all the information in the central tendency?," Working Papers 2003-002, Federal Reserve Bank of St. Louis.
  12. 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.
  13. Christian Kascha & Francesco Ravazzolo, 2008. "Combining inflation density forecasts," Working Paper 2008/22, Norges Bank.
  14. William T. Gavin & Geetanjali Pande, 2008. "FOMC consensus forecasts," Review, Federal Reserve Bank of St. Louis, issue May, pages 149-164.
  15. Tillmann, Peter, 2011. "Strategic forecasting on the FOMC," European Journal of Political Economy, Elsevier, vol. 27(3), pages 547-553, September.
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