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The FOMC versus the Staff: Where Can Monetary Policymakers Add Value?

  • Christina D. Romer
  • David H. Romer

Should monetary policymakers take the staff forecast of the effects of policy actions as given, or should they attempt to include additional information? This paper seeks to shed light on this question by testing the usefulness of the FOMC's own forecasts. Twice a year, the FOMC makes forecasts of major macroeconomic variables. FOMC members have access to the staff forecasts when they prepare their forecasts. We find that the optimal combination of the FOMC and staff forecasts in predicting inflation and unemployment puts a weight of essentially zero on the FOMC forecast and essentially one on the staff forecast: the FOMC appears to have no value added in forecasting. The results for predicting real growth are less clear-cut. We also find statistical and narrative evidence that differences between the FOMC and staff forecasts help predict monetary policy shocks, suggesting that policymakers act in part on the basis of their apparently misguided information.

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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 98 (2008)
Issue (Month): 2 (May)
Pages: 230-35

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Handle: RePEc:aea:aecrev:v:98:y:2008:i:2:p:230-35
Note: DOI: 10.1257/aer.98.2.230
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  1. Christina D. Romer & David H. Romer, 2003. "A New Measure of Monetary Shocks: Derivation and Implications," NBER Working Papers 9866, National Bureau of Economic Research, Inc.
  2. Svensson, Lars E O, 1998. "Inflation Targeting as a Monetary Policy Rule," CEPR Discussion Papers 1998, C.E.P.R. Discussion Papers.
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