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Using bank supervisory data to improve macroeconomic forecasts

  • Joe Peek
  • Eric S. Rosengren
  • Geoffrey M. B. Tootell

Locating the function of bank supervision in the central bank has been a contentious issue, both domestically and internationally. Most discussions of the role of bank supervision in central banking have focused on crisis management and the responsibilities of the central bank as a lender of last resort. However, recent research by the authors has shown that confidential supervisory information garnered through bank examinations potentially can improve the forecasts of key macroeconomic variables and thus the conduct of monetary policy. Forecasting macroeconomic variables is essential to the conduct of monetary policy, since the long lags in the effect of monetary policy ensure that changes in monetary policy today alter the economy only in the future. This article explores further the robustness of the results reported earlier. It examines the pattern of the forecast errors of the individual private forecasters studied, and confirms the earlier results. Thus, the article concludes that an important reason for central banks to have access to confidential supervisory information, and possibly to participate in its collection, is that such information can improve macroeconomic forecasts and in this way improve monetary policy decision-making.

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Article provided by Federal Reserve Bank of Boston in its journal New England Economic Review.

Volume (Year): (1999)
Issue (Month): Sep ()
Pages: 21-32

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Handle: RePEc:fip:fedbne:y:1999:i:sep:p:21-32
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  1. Bernanke, Ben S, 1983. "Nonmonetary Effects of the Financial Crisis in Propagation of the Great Depression," American Economic Review, American Economic Association, vol. 73(3), pages 257-76, June.
  2. Keane, Michael P & Runkle, David E, 1990. "Testing the Rationality of Price Forecasts: New Evidence from Panel Data," American Economic Review, American Economic Association, vol. 80(4), pages 714-35, September.
  3. Kashyap, Anil K. & Stein, Jeremy C., 1995. "The impact of monetary policy on bank balance sheets," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 42(1), pages 151-195, June.
  4. 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.
  5. Hansen, Lars Peter & Hodrick, Robert J, 1980. "Forward Exchange Rates as Optimal Predictors of Future Spot Rates: An Econometric Analysis," Journal of Political Economy, University of Chicago Press, vol. 88(5), pages 829-53, October.
  6. Joe Peek & Eric S. Rosengren & Geoffrey M. B. Tootell, 1999. "Is bank supervision central to central banking?," Working Papers 99-7, Federal Reserve Bank of Boston.
  7. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
  8. Allen Berger & Sally Davies, 1998. "The Information Content of Bank Examinations," Journal of Financial Services Research, Springer, vol. 14(2), pages 117-144, October.
  9. Walsh, Carl E, 1995. "Optimal Contracts for Central Bankers," American Economic Review, American Economic Association, vol. 85(1), pages 150-67, March.
  10. Stephen K. McNees, 1992. "How large are economic forecast errors?," New England Economic Review, Federal Reserve Bank of Boston, issue Jul, pages 25-42.
  11. Robert DeYoung & Mark J. Flannery & William W. Lang & Sorin M. Sorescu, 1998. "The informational advantage of specialized monitors: the case of bank examiners," Working Paper Series WP-98-4, Federal Reserve Bank of Chicago.
  12. Peek, Joe & Rosengren, Eric, 1995. "Bank regulation and the credit crunch," Journal of Banking & Finance, Elsevier, vol. 19(3-4), pages 679-692, June.
  13. Friedman, Benjamin M & Kuttner, Kenneth N, 1992. "Money, Income, Prices, and Interest Rates," American Economic Review, American Economic Association, vol. 82(3), pages 472-92, June.
  14. Diana Hancock & James A. Wilcox, 1992. "The effect on bank assets of business conditions and capital shortfalls," Proceedings 373, Federal Reserve Bank of Chicago.
  15. Jeremy C. Stein, 1998. "An Adverse-Selection Model of Bank Asset and Liability Management with Implications for the Transmission of Monetary Policy," RAND Journal of Economics, The RAND Corporation, vol. 29(3), pages 466-486, Autumn.
  16. Allen N. Berger & Sally M. Davies, 1994. "The information content of bank examinations," Proceedings 55, Federal Reserve Bank of Chicago.
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