Advanced Search
MyIDEAS: Login to save this paper or follow this series

Geography or skills: what explains Fed Wachters' forecast accuracy of US monetary policy?

Contents:

Author Info

  • Berger, Helge
  • Ehrmann, Michael
  • Fratzscher, Marcel

Abstract

The paper shows that there is a substantial degree of heterogeneity in the ability of Fed watchers to forecast US monetary policy decisions. Based on a novel database for 268 professional forecasters since 1999, the average forecast error of FOMC decisions varies 5 to 10 basis points between the best and worstperformers across the sample. This heterogeneity is found to be related to both the skills of analysts - such as their educational and employment backgrounds - and to geography. In particular, forecasters located in regions which experience more idiosyncratic economic conditions perform worse in anticipating monetary policy. This evidence is indicative that limited attention and heterogeneous priors are present even for anticipating important events such as monetary policy decisions. Moreover, the paper shows that such heterogeneity is economically important as it leads to greater financial market volatility after FOMC meetings. Finally, policy-makers are not impotent in influencing such heterogeneity as Fed communication is found to affect forecast accuracy significantly. --

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/10419/28077/1/571554377.PDF
Download Restriction: no

Bibliographic Info

Paper provided by Free University Berlin, School of Business & Economics in its series Discussion Papers with number 2008/11.

as in new window
Length:
Date of creation: 2008
Date of revision:
Handle: RePEc:zbw:fubsbe:200811

Contact details of provider:
Postal: Garystr. 21, 14195 Berlin (Dahlem)
Phone: (030) 838 2272
Fax: (030) 838 2129
Email:
Web page: http://www.wiwiss.fu-berlin.de/en/index.html
More information through EDIRC

Related research

Keywords: Monetary policy; forecast; Federal Reserve; FOMC; geography; skills; heterogeneity; survey data; communication; United States.;

Other versions of this item:

Find related papers by JEL classification:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Portes, Richard & Rey, Helene & Oh, Yonghyup, 2001. "Information and capital flows: The determinants of transactions in financial assets," European Economic Review, Elsevier, Elsevier, vol. 45(4-6), pages 783-796, May.
  2. Michael Woodford, 2005. "Central-bank communication and policy effectiveness," Discussion Papers, Columbia University, Department of Economics 0506-07, Columbia University, Department of Economics.
  3. Michael Ehrmann & Marcel Fratzscher, 2007. "Transparency, Disclosure, and the Federal Reserve," International Journal of Central Banking, International Journal of Central Banking, International Journal of Central Banking, vol. 3(1), pages 179-225, March.
  4. Alan S. Blinder & Michael Ehrmann & Marcel Fratzscher & Jakob De Haan & David-Jan Jansen, 2008. "Central Bank Communication and Monetary Policy: A Survey of Theory and Evidence," Journal of Economic Literature, American Economic Association, vol. 46(4), pages 910-45, December.
  5. Gurkaynak, Refet S & Sack, Brian & Swanson, Eric T, 2005. "Do Actions Speak Louder Than Words? The Response of Asset Prices to Monetary Policy Actions and Statements," MPRA Paper 820, University Library of Munich, Germany.
  6. Harrison Hong & Jeremy C. Stein, 2003. "Simple Forecasts and Paradigm Shifts," Harvard Institute of Economic Research Working Papers 2007, Harvard - Institute of Economic Research.
  7. Andrew Bauer & Robert A. Eisenbeis & Daniel F. Waggoner & Tao Zha, 2006. "Transparency, expectations, and forecasts," Working Paper, Federal Reserve Bank of Atlanta 2006-03, Federal Reserve Bank of Atlanta.
  8. N. Gregory Mankiw & Ricardo Reis & Justin Wolfers, 2003. "Disagreement about Inflation Expectations," Harvard Institute of Economic Research Working Papers 2011, Harvard - Institute of Economic Research.
  9. Gehrig, Thomas, 1993. " An Information Based Explanation of the Domestic Bias in International Equity Investment," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 95(1), pages 97-109.
  10. Berger, Helge & Ehrmann, Michael & Fratzscher, Marcel, 2006. "Forecasting ECB monetary policy: accuracy is (still) a matter of geography," Discussion Papers 2006/11, Free University Berlin, School of Business & Economics.
  11. Hong, Harrison & Stein, Jeremy, 2007. "Disagreement and the Stock Market," Scholarly Articles 2894690, Harvard University Department of Economics.
  12. Roger H. Gordon & A. Lans Bovenberg, 1994. "Why is Capital so Immobile Internationally?: Possible Explanations and Implications for Capital Income Taxation," NBER Working Papers 4796, National Bureau of Economic Research, Inc.
  13. David Laster & Paul Bennett & In Sun Geoum, 1999. "Rational Bias In Macroeconomic Forecasts," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 114(1), pages 293-318, February.
  14. Karl B. Diether & Christopher J. Malloy & Anna Scherbina, 2002. "Differences of Opinion and the Cross Section of Stock Returns," Journal of Finance, American Finance Association, American Finance Association, vol. 57(5), pages 2113-2141, October.
  15. Jun-Koo Kang & Rene M. Stulz, 1995. "Why Is There a Home Bias? An Analysis of Foreign Portfolio Equity Ownership in Japan," NBER Working Papers 5166, National Bureau of Economic Research, Inc.
  16. James D. Hamilton, 2007. "Daily Changes in Fed Funds Futures Prices," NBER Working Papers 13112, National Bureau of Economic Research, Inc.
  17. Karolyi, G. Andrew & Stulz, Rene M., 2003. "Are financial assets priced locally or globally?," Handbook of the Economics of Finance, Elsevier, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 16, pages 975-1020 Elsevier.
  18. Alan G. Ahearne & William L. Griever & Francis E. Warnock, 2000. "Information costs and home bias: an analysis of U.S. holdings of foreign equities," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 691, Board of Governors of the Federal Reserve System (U.S.).
  19. Gordon L. Clark, 2002. "London in the European financial services industry: locational advantage and product complementarities," Journal of Economic Geography, Oxford University Press, Oxford University Press, vol. 2(4), pages 433-453, October.
  20. Lange, Joe & Sack, Brian & Whitesell, William, 2003. " Anticipations of Monetary Policy in Financial Markets," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 35(6), pages 889-909, December.
  21. Kandel, Eugene & Pearson, Neil D, 1995. "Differential Interpretation of Public Signals and Trade in Speculative Markets," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 103(4), pages 831-72, August.
  22. Portes, Richard & Rey, Hélène, 1999. "The Determinants of Cross-Border Equity Flows," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2225, C.E.P.R. Discussion Papers.
  23. Bae, Kee-Hong & Stulz, René M. & Tan, Hongping, 2008. "Do local analysts know more? A cross-country study of the performance of local analysts and foreign analysts," Journal of Financial Economics, Elsevier, Elsevier, vol. 88(3), pages 581-606, June.
  24. Ben S. Bernanke & Vincent R. Reinhart & Brian P. Sack, 2004. "Monetary policy alternatives at the zero bound: an empirical assessment," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2004-48, Board of Governors of the Federal Reserve System (U.S.).
  25. Kuttner, Kenneth N., 2001. "Monetary policy surprises and interest rates: Evidence from the Fed funds futures market," Journal of Monetary Economics, Elsevier, Elsevier, vol. 47(3), pages 523-544, June.
  26. Froot, Kenneth A & Stein, Jeremy C, 1991. "Exchange Rates and Foreign Direct Investment: An Imperfect Capital Markets Approach," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 106(4), pages 1191-217, November.
  27. Michael Ehrmann & Marcel Fratzscher, 2007. "Communication by Central Bank Committee Members: Different Strategies, Same Effectiveness?," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 39(2-3), pages 509-541, 03.
  28. Krugman, Paul, 1998. "What's New about the New Economic Geography?," Oxford Review of Economic Policy, Oxford University Press, Oxford University Press, vol. 14(2), pages 7-17, Summer.
  29. Refet S. Gürkaynak & Brian Sack & Eric Swanson, 2002. "Market-based measures of monetary policy expectations," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2002-40, Board of Governors of the Federal Reserve System (U.S.).
  30. Guthrie, Graeme & Wright, Julian, 2000. "Open mouth operations," Journal of Monetary Economics, Elsevier, Elsevier, vol. 46(2), pages 489-516, October.
  31. Tomás Dvorák, 2005. "Do Domestic Investors Have an Information Advantage? Evidence from Indonesia," Journal of Finance, American Finance Association, American Finance Association, vol. 60(2), pages 817-839, 04.
  32. Strauss-Kahn, Vanessa & Vives, Xavier, 2009. "Why and where do headquarters move?," Regional Science and Urban Economics, Elsevier, Elsevier, vol. 39(2), pages 168-186, March.
  33. Alan S. Blinder, 1999. "Central Banking in Theory and Practice," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262522608, December.
  34. William Poole & Robert H & Rasche & Daniel L. Thornton, 2002. "Market anticipations of monetary policy actions," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 65-94.
  35. Harris, Milton & Raviv, Artur, 1993. "Differences of Opinion Make a Horse Race," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 6(3), pages 473-506.
  36. Hirshleifer, David & Teoh, Siew Hong, 2003. "Limited attention, information disclosure, and financial reporting," Journal of Accounting and Economics, Elsevier, Elsevier, vol. 36(1-3), pages 337-386, December.
  37. Joshua D. Coval & Tobias J. Moskowitz, 1999. "Home Bias at Home: Local Equity Preference in Domestic Portfolios," Journal of Finance, American Finance Association, American Finance Association, vol. 54(6), pages 2045-2073, December.
  38. Gary A. S. Cook & Naresh R. Pandit & Jonathan V. Beaverstock & Peter J. Taylor & Kathy Pain, 2004. "The Clustering of Financial Services in London," ERSA conference papers ersa04p49, European Regional Science Association.
  39. Harald Hau, 2001. "Location Matters: An Examination of Trading Profits," Journal of Finance, American Finance Association, American Finance Association, vol. 56(5), pages 1959-1983, October.
  40. Ehrmann, Michael & Fratzscher, Marcel, 2005. "Communication and decision-making by central bank committees: different strategies, same effectiveness?," Working Paper Series, European Central Bank 0488, European Central Bank.
  41. Michael Ehrmann & Marcel Fratzscher & Helge Berger, 2006. "Forecasting ECB Monetary Policy," IMF Working Papers 06/41, International Monetary Fund.
  42. Ehrmann, Michael & Fratzscher, Marcel, 2005. "How should central banks communicate?," Working Paper Series, European Central Bank 0557, European Central Bank.
  43. Tomas Dvorak, 2001. "Do Domestic Investors Have an Information Advantage? Evidence from Indonesia," Department of Economics Working Papers 2001-04, Department of Economics, Williams College.
  44. Swanson, Eric T., 2006. "Have Increases in Federal Reserve Transparency Improved Private Sector Interest Rate Forecasts?," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 38(3), pages 791-819, April.
  45. Lei Feng & Mark S. Seasholes, 2004. "Correlated Trading and Location," Journal of Finance, American Finance Association, American Finance Association, vol. 59(5), pages 2117-2144, October.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Fendel, Ralf & Frenkel, Michael & Rülke, Jan-Christoph, 2011. "'Ex-ante' Taylor rules - Newly discovered evidence from the G7 countries," Journal of Macroeconomics, Elsevier, Elsevier, vol. 33(2), pages 224-232, June.

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:fubsbe:200811. 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.