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

  • 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)

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.

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File URL: http://www.gwu.edu/~iiep/assets/docs/papers/Sinclair_IIEPWP2008-5.pdf
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Paper provided by The George Washington University, Institute for International Economic Policy in its series Working Papers with number 2008-05.

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Length: 24 pages
Date of creation: Jun 2009
Date of revision:
Handle: RePEc:gwi:wpaper:2008-05
Contact details of provider: Web page: http://www.gwu.edu/~iiep/
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