Transparency, expectations and forecasts
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.
Volume (Year): (2006)
Issue (Month): Q 1 ()
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References listed on IDEAS
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- 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.
- 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.).
- 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.
- Michael Woodford, 2005.
"Central Bank Communication and Policy Effectiveness,"
NBER Working Papers
11898, National Bureau of Economic Research, Inc.
- 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.
- John C. Robertson & Ellis W. Tallman, 1999.
"Improving forecasts of the federal funds rate in a policy model,"
FRB Atlanta Working Paper
99-3, Federal Reserve Bank of Atlanta.
- 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.
- Christopher A. Sims & Tao Zha, 2005.
"Were There Regime Switches in U.S. Monetary Policy?,"
92, Princeton University, Department of Economics, Center for Economic Policy Studies..
- 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.
- Christopher A. Sims & Tao Zha, 2004. "Were there regime switches in U.S. monetary policy?," FRB Atlanta Working Paper 2004-14, Federal Reserve Bank of Atlanta.
- 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.
- John C. Robertson & Ellis W. Tallman, 1999. "Vector autoregressions: forecasting and reality," Economic Review, Federal Reserve Bank of Atlanta, issue Q1, pages 4-18.
- repec:pri:cepsud:110sims is not listed on IDEAS
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