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The FOMC versus the Staff: Where Can Monetary Policymakers Add Value?

  • Christina D. Romer
  • David H. Romer

Should monetary policymakers take the staff forecast of the effects of policy actions as given, or should they attempt to include additional information? This paper seeks to shed light on this question by testing the usefulness of the FOMC's own forecasts. Twice a year, the FOMC makes forecasts of major macroeconomic variables. FOMC members have access to the staff forecasts when they prepare their forecasts. We find that the optimal combination of the FOMC and staff forecasts in predicting inflation and unemployment puts a weight of essentially zero on the FOMC forecast and essentially one on the staff forecast: the FOMC appears to have no value added in forecasting. The results for predicting real growth are less clear-cut. We also find statistical and narrative evidence that differences between the FOMC and staff forecasts help predict monetary policy shocks, suggesting that policymakers act in part on the basis of their apparently misguided information.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13751.

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Date of creation: Jan 2008
Date of revision:
Publication status: published as Christina D. Romer & David H. Romer, 2008. "The FOMC versus the Staff: Where Can Monetary Policymakers Add Value?," American Economic Review, American Economic Association, vol. 98(2), pages 230-35, May.
Handle: RePEc:nbr:nberwo:13751
Note: EFG ME
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  1. Svensson, L.E.O., 1998. "Inflation Targeting as a Monetary Policy Rule," Papers 646, Stockholm - International Economic Studies.
  2. Christina D. Romer & David H. Romer, 2003. "A New Measure of Monetary Shocks: Derivation and Implications," NBER Working Papers 9866, National Bureau of Economic Research, Inc.
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