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A medium scale forecasting model for monetary policy


  • Kenneth Beauchemin
  • Saeed Zaman


This paper presents a 16-variable Bayesian VAR forecasting model of the U.S. economy for use in a monetary policy setting. The variables that comprise the model are selected not only for their effectiveness in forecasting the primary variables of interest, but also for their relevance to the monetary policy process. In particular, the variables largely coincide with those of an augmented New-Keynesian DSGE model. We provide out-of sample forecast evaluations and illustrate the computation and use of predictive densities and fan charts. Although the reduced form model is the focus of the paper, we also provide an example of structural analysis to illustrate the macroeconomic response of a monetary policy shock.

Suggested Citation

  • Kenneth Beauchemin & Saeed Zaman, 2011. "A medium scale forecasting model for monetary policy," Working Paper 1128, Federal Reserve Bank of Cleveland.
  • Handle: RePEc:fip:fedcwp:1128

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    References listed on IDEAS

    1. Robertson, John C & Tallman, Ellis W & Whiteman, Charles H, 2005. "Forecasting Using Relative Entropy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(3), pages 383-401, June.
    2. Thomas Doan & Robert B. Litterman & Christopher A. Sims, 1983. "Forecasting and Conditional Projection Using Realistic Prior Distributions," NBER Working Papers 1202, National Bureau of Economic Research, Inc.
    3. Andrea Carriero & Todd E. Clark & Massimiliano Marcellino, 2015. "Bayesian VARs: Specification Choices and Forecast Accuracy," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 30(1), pages 46-73, January.
    4. Gordon, David B & Leeper, Eric M, 1994. "The Dynamic Impacts of Monetary Policy: An Exercise in Tentative Identification," Journal of Political Economy, University of Chicago Press, vol. 102(6), pages 1228-1247, December.
    5. Domenico Giannone & Michele Lenza & Giorgio E. Primiceri, 2015. "Prior Selection for Vector Autoregressions," The Review of Economics and Statistics, MIT Press, vol. 97(2), pages 436-451, May.
    6. Marta Banbura & Domenico Giannone & Lucrezia Reichlin, 2010. "Large Bayesian vector auto regressions," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 25(1), pages 71-92.
    7. Marta Banbura & Domenico Giannone & Lucrezia Reichlin, 2010. "Large Bayesian vector auto regressions," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 25(1), pages 71-92.
    8. Litterman, Robert B, 1986. "Forecasting with Bayesian Vector Autoregressions-Five Years of Experience," Journal of Business & Economic Statistics, American Statistical Association, vol. 4(1), pages 25-38, January.
    9. John C. Robertson & Ellis W. Tallman, 1999. "Vector autoregressions: forecasting and reality," Economic Review, Federal Reserve Bank of Atlanta, issue Q1, pages 4-18.
    10. Kadiyala, K Rao & Karlsson, Sune, 1997. "Numerical Methods for Estimation and Inference in Bayesian VAR-Models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 12(2), pages 99-132, March-Apr.
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    Cited by:

    1. Tasci, Murat & Verbrugge, Randal, 2014. "How Much Slack Is in the Labor Market? That Depends on What You Mean by Slack," Economic Commentary, Federal Reserve Bank of Cleveland, issue Oct.
    2. Brent Meyer & Saeed Zaman, 2013. "It’s not just for inflation: The usefulness of the median CPI in BVAR forecasting," Working Paper 1303, Federal Reserve Bank of Cleveland.
    3. Simone Auer, 2014. "Monetary Policy Shocks and Foreign Investment Income: Evidence from a large Bayesian VAR," Working Papers 2014-02, Swiss National Bank.
    4. Ellis W. Tallman & Saeed Zaman, 2012. "Where would the federal funds rate be, if it could be negative?," Economic Commentary, Federal Reserve Bank of Cleveland, issue Oct.
    5. Meyer, Brent & Zaman, Saeed, 2016. "The Usefulness of the Median CPI in Bayesian VARs Used for Macroeconomic Forecasting and Policy," FRB Atlanta Working Paper 2016-13, Federal Reserve Bank of Atlanta.
    6. Boris B. Demeshev & Oxana A. Malakhovskaya, 2015. "Forecasting Russian Macroeconomic Indicators with BVAR," HSE Working papers WP BRP 105/EC/2015, National Research University Higher School of Economics.
    7. Todd E. Clark & Michael W. McCracken, 2013. "Evaluating the accuracy of forecasts from vector autoregressions," Working Papers 2013-010, Federal Reserve Bank of St. Louis.

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    Forecasting ; Monetary policy;

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