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Jointly Evaluating GDP and Inflation Forcasts in the Context of the Taylor Rule

Author

Listed:
  • Tara Sinclair

    () (Department of Economics/Institute for International Economic Policy, George Washington University)

  • H.O. Stekler

    ()

  • Elizabeth Reid

    () (Department of Economics, George Washington University)

  • Edward N. Gamber

    () (Department of Economics and Business, Lafayette College)

Abstract

This paper evaluates the potential impact of forecast errors on policy. We jointly evaluate the Federal Reserve staff forecasts of U.S. real output growth and the inflation rate in the context of the Taylor (1993) monetary policy rule. Our simple methodology generates policy forecast errors which have a direct interpretation for the impact of forecast errors on policy. Without interest rate smoothing, we find that, on average, Fed policy based on the Taylor rule would have been approximately a full percentage point away from the intended target because of errors in forecasting output growth and inflation.

Suggested Citation

  • Tara Sinclair & H.O. Stekler & Elizabeth Reid & Edward N. Gamber, 2009. "Jointly Evaluating GDP and Inflation Forcasts in the Context of the Taylor Rule," Working Papers 2008-05, The George Washington University, Institute for International Economic Policy.
  • Handle: RePEc:gwi:wpaper:2008-05
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    File URL: http://www.gwu.edu/~iiep/assets/docs/papers/Sinclair_IIEPWP2008-5.pdf
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    Cited by:

    1. Lahiri, Kajal & Sheng, Xuguang, 2010. "Learning and heterogeneity in GDP and inflation forecasts," International Journal of Forecasting, Elsevier, vol. 26(2), pages 265-292, April.

    More about this item

    Keywords

    Forecast Evaluation; Federal Reserve Forecasts; Monetary Policy;

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • 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
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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