Transparency, expectations and forecasts

Bauer, Andrew; Eisenbeis, Robert A.; Waggoner, Daniel F.; Zha, Tao

Journal Article

Transparency, expectations and forecasts

Abstract: Many economists believe that a central bank?s transparency about its objectives, economic outlook, and policy changes affect the public?s views about future economic and financial conditions. In keeping with this theory, since 1994 the Federal Open Market Committee has gradually increased the transparency of its statements accompanying changes in the federal funds rate target. ; This article investigates whether private agents? ability to predict the economy?s direction has improved since 1994. The analysis focuses on forecasts of macroeconomic variables such as inflation, gross domestic product growth, and unemployment and policy variables such as short-term interest rates. Private agents? current-year and next-year forecasts in the monthly Blue Chip Economic Indicators surveys from 1986 to 2004 serve as proxies for the public?s short-term and longer-term expectations. ; The econometric methodology decomposes forecast accuracy into two components: the common error that affects all individual participants and the idiosyncratic error that reflects discrepant views among individuals. The analysis indicates that idiosyncratic errors have steadily declined and individuals? forecasts have been more synchronized since 1994 while common forecast errors?likely associated with business cycles and other economic shocks?have been largely unaffected. ; Although these findings show little evidence that transparent monetary policy enhances the public?s ability to predict business cycles, the authors note that the data sample may not be long enough to reveal such effects.

Keywords: Federal Open Market Committee; Economic forecasting;