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Monetary policy in a data-rich environment

  • Bernanke, Ben S.
  • Boivin, Jean

Most empirical analyses of monetary policy have been confined to frameworks in which the Federal Reserve is implicitly assumed to exploit only a limited amount of information, despite the fact that the Fed actively monitors literally thousands of economic time series. This article explores the feasibility of incorporating richer information sets into the analysis, both positive and normative, of Fed policymaking. We employ a factor-model approach, developed by Stock and Watson (1999a,b), that permits the systematic information in large data sets to be summarized by relatively few estimated factors. With this framework, we reconfirm Stock and Watson's result that the use of large data sets can improve forecast accuracy, and we show that this result does not seem to depend on the use of finally revised (as opposed to 'real-time') data. We estimate policy reaction functions for the Fed that take into account its data-rich environment and provide a test of the hypothesis that Fed actions are explained solely by its forecasts of inflation and real activity. Finally, we explore the possibility of developing an 'expert system' that could aggregate diverse information and provide benchmark policy settings.

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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 50 (2003)
Issue (Month): 3 (April)
Pages: 525-546

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Handle: RePEc:eee:moneco:v:50:y:2003:i:3:p:525-546
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505566

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  1. Richard Clarida & Jordi Gali & Mark Gertler, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," NBER Working Papers 7147, National Bureau of Economic Research, Inc.
  2. Stock, James H & Watson, Mark W, 2002. "Macroeconomic Forecasting Using Diffusion Indexes," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(2), pages 147-62, April.
  3. John B. Taylor, 1999. "Monetary Policy Rules," NBER Books, National Bureau of Economic Research, Inc, number tayl99-1, December.
  4. Nicoletta Batini & Andrew Haldane, 1999. "Forward-Looking Rules for Monetary Policy," NBER Chapters, in: Monetary Policy Rules, pages 157-202 National Bureau of Economic Research, Inc.
  5. Forni, Mario & Reichlin, Lucrezia, 1995. "Dynamic Common Factors in Large Cross-Sections," CEPR Discussion Papers 1285, C.E.P.R. Discussion Papers.
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  8. Eric Ghysels & Norman R. Swanson & Myles Callan, 2002. "Monetary Policy Rules with Model and Data Uncertainty," Southern Economic Journal, Southern Economic Association, vol. 69(2), pages 239-265, October.
  9. Athanasios Orphanides, 2001. "Monetary Policy Rules Based on Real-Time Data," American Economic Review, American Economic Association, vol. 91(4), pages 964-985, September.
  10. Clarida, R. & Gali, J. & Gertler, M., 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and some Theory," Working Papers 98-01, C.V. Starr Center for Applied Economics, New York University.
  11. Mario Forni & Marc Hallin & Lucrezia Reichlin & Marco Lippi, 2000. "The generalised dynamic factor model: identification and estimation," ULB Institutional Repository 2013/10143, ULB -- Universite Libre de Bruxelles.
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  15. James H. Stock & Mark W. Watson, 1989. "New Indexes of Coincident and Leading Economic Indicators," NBER Chapters, in: NBER Macroeconomics Annual 1989, Volume 4, pages 351-409 National Bureau of Economic Research, Inc.
  16. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1998. "Monetary Policy Shocks: What Have We Learned and to What End?," NBER Working Papers 6400, National Bureau of Economic Research, Inc.
  17. Dean Croushore & Tom Stark, 1999. "A real-time data set for marcoeconomists: does the data vintage matter?," Working Papers 99-21, Federal Reserve Bank of Philadelphia.
  18. Forni, Mario & Lippi, Marco, 2001. "The Generalized Dynamic Factor Model: Representation Theory," Econometric Theory, Cambridge University Press, vol. 17(06), pages 1113-1141, December.
  19. David H. Romer & Christina D. Romer, 2000. "Federal Reserve Information and the Behavior of Interest Rates," American Economic Review, American Economic Association, vol. 90(3), pages 429-457, June.
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