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A defence of the FOMC

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  • Martin Ellison
  • Thomas J. Sargent

Abstract

We defend the forecasting performance of the FOMC from the recent criticism of Christina and David Romer.� Our argument is that the FOMC forecasts a worst-case scenario that it uses to design decisions that will work well enough (are robust) despite possible misspecification of its model.� Because these FOMC forecasts are not predictions of what the FOMC expects to occur under its model, it is inappropriate to compare their performance in a horse race against other forecasts.� Our interpretation of the FOMC as a robust policymaker can explain all the findings of the Romers and rationalises differences between FOMC forecasts and forecasts published in the Greenbook by the staff of the Federal Reserve System.

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Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 457.

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Date of creation: 01 Oct 2009
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Handle: RePEc:oxf:wpaper:457

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Keywords: Forecasting; Monetary policy; Robustness;

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Cited by:
  1. Kliem, Martin & Kriwoluzky, Alexander, 2013. "Reconciling narrative monetary policy disturbances with structural VAR model shocks?," Economics Letters, Elsevier, Elsevier, vol. 121(2), pages 247-251.
  2. Hansen, Lars Peter & Mayer, Ricardo & Sargent, Thomas, 2010. "Robust hidden Markov LQG problems," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 34(10), pages 1951-1966, October.
  3. Makram El-Shagi & Sebastian Giesen & A. Jung, 2012. "Does Central Bank Staff Beat Private Forecasters?," IWH Discussion Papers, Halle Institute for Economic Research 5, Halle Institute for Economic Research.
  4. Ravn, Søren Hove, 2014. "Asymmetric monetary policy towards the stock market: A DSGE approach," Journal of Macroeconomics, Elsevier, Elsevier, vol. 39(PA), pages 24-41.
  5. Richard Dennis, 2012. "Sources of Disagreement in Inflation Forecasts: An International Empirical Investigation," CAMA Working Papers 2012-42, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  6. Carl Andreas Claussen & Egil Matsen & Øistein Røisland & Ragnar Torvik, 2009. "Overconfidence, Monetary Policy Committees and Chairman Dominance," Working Paper, Norges Bank 2009/17, Norges Bank.
  7. Gadi Barlevy, 2011. "Robustness and Macroeconomic Policy," Annual Review of Economics, Annual Reviews, Annual Reviews, vol. 3(1), pages 1-24, 09.
  8. Chanont Banternghansa & Michael W. McCracken, 2009. "Forecast disagreement among FOMC members," Working Papers, Federal Reserve Bank of St. Louis 2009-059, Federal Reserve Bank of St. Louis.
  9. Christian Pierdzioch & Jan-Christoph Rülke & Peter Tillmann, 2013. "Using forecasts to uncover the loss function of FOMC members," MAGKS Papers on Economics, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung) 201302, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
  10. Peter Tillmann, 2009. "The Fed’s perceived Phillips curve: Evidence from individual FOMC forecasts," MAGKS Papers on Economics, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung) 200946, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).

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