Advanced Search
MyIDEAS: Login

Forecast quality and simple instrument rules: a real-time data approach

Contents:

Author Info

  • Glück, Heinz
  • Schleicher, Stefan P.
Registered author(s):

    Abstract

    We start from the assertion that a useful monetary policy design should be founded on more realistic assumptions about what policymakers can know at the time when policy decisions have to be made. Since the Taylor rule – if used as an operational device - implies a forward looking behaviour, we analyze the reliability of the input information. We investigate the forecasting performance of OECD projections for GDP growth rates and inflation. We diagnose a much better forecasting record for inflation rates compared to GDP growth rates, which for most countries are almost uninformative at the time a Taylor rule should sensibly be applied. Using this data set, we find significant differences between Taylor rules estimated over revised data compared to real-time data. There is evidence that monetary policy seems to react more actively in real time than rules estimated over revised data suggest. Given the evidence of systematic errors in OECD forecasts, in a next step we attempt to correct for these forecast biases and check to which extent this can lower the errors in interest rate policy setting. An ex-ante simulation for the years 1991 to 2001 supports the proposal that correcting for forecast errors and biases based on an error model can lower the resulting policy error in interest rate setting for most countries under consideration. In addition we investigate to what extent structural changes in the policy reaction behaviour can be handled with moving instead of expanding samples. Our results point out that the information set available needs a careful examination when applied to instrument rules like those of the Taylor type. Limited forecast quality and significant data revisions recommend a more sophisticated handling of the dated information, for which we present an operational procedure that has the potential of reducing the risk of severe policy errors. --

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://econstor.eu/bitstream/10419/19497/1/200430dkp.pdf
    Download Restriction: no

    Bibliographic Info

    Paper provided by Deutsche Bundesbank, Research Centre in its series Discussion Paper Series 1: Economic Studies with number 2004,30.

    as in new window
    Length:
    Date of creation: 2004
    Date of revision:
    Handle: RePEc:zbw:bubdp1:2296

    Contact details of provider:
    Postal: Postfach 10 06 02, 60006 Frankfurt
    Phone: 0 69 / 95 66 - 34 55
    Fax: 0 69 / 95 66 30 77
    Email:
    Web page: http://www.bundesbank.de/
    More information through EDIRC

    Related research

    Keywords: Monetary policy rules; economic forecasting; OECD; real-time data;

    Find related papers by JEL classification:

    References

    No references listed on IDEAS
    You can help add them by filling out this form.

    Citations

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:zbw:bubdp1:2296. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (ZBW - German National Library of Economics).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.