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Jointly Evaluating the Federal Reserve’s Forecasts of GDP Growth and Inflation

Listed author(s):
  • Tara M. Sinclair

    ()

    (Department of Economics, George Washington University)

  • Edward N. Gamber

    ()

    (Department of Economics and Business, Lafayette College)

  • H.O. Stekler

    ()

    (Department of Economics, George Washington University)

  • Elizabeth Reid

    ()

    (Department of Economics, George Washington University)

In this paper we jointly evaluate the Federal Reserve staff forecasts of U.S. real output growth and the inflation rate assuming the forecasts are to be used as inputs for the Taylor rule. Our simple methodology generates “policy forecast errors” which have a direct interpretation for the impact of forecast errors on the target interest rate given by the Taylor rule. Without interest rate smoothing, we find that, on average, the Taylor rule target interest rate would have been approximately a full percentage point away from the intended target because of errors in forecasting output growth and inflation. Our results are robust to changes in the forecast horizon and to changes in the weights on the variables in the policy rule.

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File URL: https://www2.gwu.edu/~forcpgm/2008-002.pdf
File Function: First version, 2008
Download Restriction: no

File URL: https://www2.gwu.edu/~forcpgm/2008-002.pdf
File Function: Revised version, 2011
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Paper provided by The George Washington University, Department of Economics, Research Program on Forecasting in its series Working Papers with number 2008-002.

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Length: 13 pages
Date of creation: Apr 2008
Date of revision: Mar 2011
Handle: RePEc:gwc:wpaper:2008-002
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  1. Athanasios Orphanides & John C. Williams, 2007. "Robust monetary policy with imperfect knowledge," Working Paper Series 2007-08, Federal Reserve Bank of San Francisco.
  2. John B. Taylor, 1999. "Introduction to "Monetary Policy Rules"," NBER Chapters, in: Monetary Policy Rules, pages 1-14 National Bureau of Economic Research, Inc.
  3. Capistrán, Carlos, 2008. "Bias in Federal Reserve inflation forecasts: Is the Federal Reserve irrational or just cautious?," Journal of Monetary Economics, Elsevier, vol. 55(8), pages 1415-1427, November.
  4. Richard Clarida & Jordi Gali & Mark Gertler, 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," NBER Working Papers 6442, National Bureau of Economic Research, Inc.
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