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Transparency, expectations and forecasts

Author

Listed:
  • Andrew Bauer
  • Robert A. Eisenbeis
  • Daniel F. Waggoner
  • Tao Zha

Abstract

Many economists believe that a central bank’s transparency about its objectives, economic outlook, and policy changes affect the public’s views about future economic and financial conditions. In keeping with this theory, since 1994 the Federal Open Market Committee has gradually increased the transparency of its statements accompanying changes in the federal funds rate target. ; This article investigates whether private agents’ ability to predict the economy’s direction has improved since 1994. The analysis focuses on forecasts of macroeconomic variables such as inflation, gross domestic product growth, and unemployment and policy variables such as short-term interest rates. Private agents’ current-year and next-year forecasts in the monthly Blue Chip Economic Indicators surveys from 1986 to 2004 serve as proxies for the public’s short-term and longer-term expectations. ; The econometric methodology decomposes forecast accuracy into two components: the common error that affects all individual participants and the idiosyncratic error that reflects discrepant views among individuals. The analysis indicates that idiosyncratic errors have steadily declined and individuals’ forecasts have been more synchronized since 1994 while common forecast errors—likely associated with business cycles and other economic shocks—have been largely unaffected. ; Although these findings show little evidence that transparent monetary policy enhances the public’s ability to predict business cycles, the authors note that the data sample may not be long enough to reveal such effects.

Suggested Citation

  • Andrew Bauer & Robert A. Eisenbeis & Daniel F. Waggoner & Tao Zha, 2006. "Transparency, expectations and forecasts," Economic Review, Federal Reserve Bank of Atlanta, issue Q 1, pages 1-25.
  • Handle: RePEc:fip:fedaer:y:2006:i:q1:p:1-25:n:v.91no.1
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    References listed on IDEAS

    as
    1. Andrew Bauer & Robert A. Eisenbeis & Daniel F. Waggoner & Tao Zha, 2003. "Forecast evaluation with cross-sectional data: The Blue Chip Surveys," Economic Review, Federal Reserve Bank of Atlanta, issue Q2, pages 17-31.
    2. Donald L. Kohn & Brian P. Sack, 2003. "Central bank talk: does it matter and why?," Finance and Economics Discussion Series 2003-55, Board of Governors of the Federal Reserve System (U.S.).
    3. James H. Stock & Mark W. Watson, 2003. "Has the business cycle changed?," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 9-56.
    4. Michael Woodford, 2005. "Central bank communication and policy effectiveness," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, issue Aug, pages 399-474.
    5. Robertson, John C & Tallman, Ellis W, 2001. "Improving Federal-Funds Rate Forecasts in VAR Models Used for Policy Analysis," Journal of Business & Economic Statistics, American Statistical Association, vol. 19(3), pages 324-330, July.
    6. Christopher A. Sims & Tao Zha, 2006. "Were There Regime Switches in U.S. Monetary Policy?," American Economic Review, American Economic Association, vol. 96(1), pages 54-81, March.
    7. Robert A. Eisenbeis & Daniel F. Waggoner & Tao Zha, 2002. "Evaluating Wall Street Journal survey forecasters: a multivariate approach," FRB Atlanta Working Paper 2002-8, Federal Reserve Bank of Atlanta.
    8. John C. Robertson & Ellis W. Tallman, 1999. "Vector autoregressions: forecasting and reality," Economic Review, Federal Reserve Bank of Atlanta, issue Q1, pages 4-18.
    9. repec:pri:cepsud:110sims is not listed on IDEAS
    10. Michael Ehrmann, 2006. "Central bank communication," Research Bulletin, European Central Bank, vol. 5, pages 2-5.
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    Citations

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    Cited by:

    1. Trabelsi, Emna, 2016. "Central bank transparency and the consensus forecast: What does The Economist poll of forecasters tell us?," Research in International Business and Finance, Elsevier, pages 338-359.
    2. Higgins, Patrick & Zha, Tao & Zhong, Wenna, 2016. "Forecasting China's economic growth and inflation," China Economic Review, Elsevier, vol. 41(C), pages 46-61.
    3. Paul Hubert, 2015. "The Influence and Policy Signalling Role of FOMC Forecasts," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 77(5), pages 655-680, October.
    4. Michael Ehrmann & Sylvester Eijffinger & Marcel Fratzscher, 2012. "The Role of Central Bank Transparency for Guiding Private Sector Forecasts," Scandinavian Journal of Economics, Wiley Blackwell, vol. 114(3), pages 1018-1052, September.
    5. Gerunov, Anton, 2014. "Критичен Преглед На Основните Подходи За Моделиране На Икономическите Очаквания
      [A Critical Review of Major Approaches for Modeling Economic Expectations]
      ," MPRA Paper 68797, University Library of Munich, Germany.
    6. Carin van der Cruijsen & Sylvester Eijffinger, 2007. "The economic impact of central bank transparency: a survey," DNB Working Papers 132, Netherlands Central Bank, Research Department.
    7. Mihaela SIMIONESCU, 2015. "The Evaluation of Global Accuracy of Romanian Inflation Rate Predictions Using Mahalanobis Distance," Management Dynamics in the Knowledge Economy Journal, College of Management, National University of Political Studies and Public Administration, vol. 3(1), pages 133-149, March.
    8. Paul Hubert, 2014. "FOMC Forecasts as a Focal Point for Private Expectations," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 46(7), pages 1381-1420, October.
    9. Berger, Helge & Ehrmann, Michael & Fratzscher, Marcel, 2011. "Geography, skills or both: What explains Fed watchers' forecast accuracy of US monetary policy?," Journal of Macroeconomics, Elsevier, vol. 33(3), pages 420-437, September.
    10. Dunbar, Kwamie & Amin, Abu S., 2015. "The nature and impact of the market forecasting errors in the Federal funds futures market," The North American Journal of Economics and Finance, Elsevier, vol. 31(C), pages 174-192.
    11. Berger, Helge & Ehrmann, Michael & Fratzscher, Marcel, 2006. "Geography or skills: What explains Fed watchers’ forecast accuracy of US monetary policy?," Working Paper Series 695, European Central Bank.
    12. M. Middeldorp, 2011. "Central Bank Transparency, the Accuracy of Professional Forecasts, and Interest Rate Volatility," Working Papers 11-12, Utrecht School of Economics.
    13. Colarossi, Silvio & Zaghini, Andrea, 2007. "Gradualism, transparency and improved operational framework: A look at the overnight volatility transmission," CFS Working Paper Series 2007/16, Center for Financial Studies (CFS).
    14. Silvio Colarossi & Andrea Zaghini, 2009. "Gradualism, transparency and the improved operational framework: a look at the overnight volatility transmission," Temi di discussione (Economic working papers) 710, Bank of Italy, Economic Research and International Relations Area.
    15. van der Cruijsen, C.A.B., 2008. "The economic impact of central bank transparency," Other publications TiSEM 86c1ba91-1952-45b4-adac-8, Tilburg University, School of Economics and Management.

    More about this item

    Keywords

    Federal Open Market Committee ; Economic forecasting;

    JEL classification:

    • E59 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Other
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models

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