Does the FOMC Have Expertise, and Can It Forecast?
The primary purpose of the paper is to answer the following two questions regarding the performance of the influential Federal Open Market Committee (FOMC) of the Federal Reserve System, in comparison with the forecasts contained in the "Greenbooks" of the professional staff of the Board of Governors: Does the FOMC have expertise, and can it forecast better than the staff? The FOMC forecasts that are analyzed in practice are nonreplicable forecasts. In order to evaluate such forecasts, this paper develops a model to generate replicable FOMC forecasts, and compares the staff forecasts, non-replicable FOMC forecasts, and replicable FOMC forecasts, considers optimal forecasts and efficient estimation methods, and presents a direct test of FOMC expertise on nonreplicable FOMC forecasts. The empirical analysis of Romer and Romer (2008) is reexamined to evaluate whether their criticisms of the FOMC's forecasting performance should be accepted unreservedly, or might be open to alternative interpretations.
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- 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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- Philip Hans Franses & Michael McAleer & Rianne Legerstee, 2009.
"Expert opinion versus expertise in forecasting,"
Netherlands Society for Statistics and Operations Research, vol. 63(3), pages 334-346.
- McAleer, Michael, 1995. "The significance of testing empirical non-nested models," Journal of Econometrics, Elsevier, vol. 67(1), pages 149-171, May.
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