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

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Author Info
Berger, Helge
Ehrmann, Michael
Fratzscher, Marcel

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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.

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File URL: http://hdl.handle.net/10419/28077
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Publisher Info
Paper provided by Free University Berlin, School of Business & Economics in its series Discussion Papers with number 2008/11.

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Date of creation: 2008
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Handle: RePEc:zbw:fubsbe:200811

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

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Find related papers by JEL classification:
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies

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