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What's the Story? A New Perspective on the Value of Economic Forecasts

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Abstract

We apply textual analysis tools to measure the degree of optimism versus pessimism of the text that describes Federal Reserve Board forecasts published in the Greenbook. The resulting measure of Greenbook text sentiment, ?Tonality,? is found to be strongly correlated, in the intuitive direction, with the Greenbook point forecast for key economic variables such as unemployment and inflation. We then examine whether Tonality has incremental power for predicting unemployment, GDP growth, and inflation up to four quarters ahead. We find it to have significant and substantive predictive power for both GDP growth and unemployment, particularly since 1991: higher (more optimistic) Tonality presages higher GDP growth and lower unemployment, relative to the Greenbook point forecasts. We then test whether Tonality helps predict monetary policy and stock returns. Higher Tonality has some power to predict tighter than forecasted monetary policy, while it has substantial power fo r predicting higher 3-month, 6-month, and 12-month stock market returns.

Suggested Citation

  • Christopher A. Hollrah & Steven A. Sharpe & Nitish R. Sinha, 2017. "What's the Story? A New Perspective on the Value of Economic Forecasts," Finance and Economics Discussion Series 2017-107, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgfe:2017-107
    DOI: 10.17016/FEDS.2017.107r1
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    References listed on IDEAS

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    More about this item

    Keywords

    Economic Forecasts; Monetary policy; Text Analysis;

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G40 - Financial Economics - - Behavioral Finance - - - General

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