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A medium scale forecasting model for monetary policy

Author

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  • Kenneth Beauchemin
  • Saeed Zaman

Abstract

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 Papers (Old Series) 1128, Federal Reserve Bank of Cleveland.
    • Handle: RePEc:fip:fedcwp:1128
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    2. Murat Tasci & Randal J. Verbrugge, 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.
    3. Brent Meyer & Saeed Zaman, 2019. "The usefulness of the median CPI in Bayesian VARs used for macroeconomic forecasting and policy," Empirical Economics, Springer, vol. 57(2), pages 603-630, August.
    4. Tallman, Ellis W. & Zaman, Saeed, 2020. "Combining survey long-run forecasts and nowcasts with BVAR forecasts using relative entropy," International Journal of Forecasting, Elsevier, vol. 36(2), pages 373-398.
    5. Brent Meyer & Saeed Zaman, 2013. "It’s not just for inflation: The usefulness of the median CPI in BVAR forecasting," Working Papers (Old Series) 1303, Federal Reserve Bank of Cleveland.
    6. Auer, Simone, 2019. "Monetary policy shocks and foreign investment income: Evidence from a large Bayesian VAR," Journal of International Money and Finance, Elsevier, vol. 93(C), pages 142-166.
    7. 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.
    8. 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.
    9. Knotek, Edward S. & Zaman, Saeed, 2019. "Financial nowcasts and their usefulness in macroeconomic forecasting," International Journal of Forecasting, Elsevier, vol. 35(4), pages 1708-1724.
    10. 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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