Our website will undergo scheduled maintenance on the morning of Thursday, August 11, 2022. During this time, connection to our website and some of its features may be unavailable. Thank you for your patience and we apologize for any inconvenience.

Working Paper

Reconsidering the Fed’s Forecasting Advantage


Abstract: Previous studies show the Fed has a forecast advantage over the private sector, either because it devotes more resources to forecasting or because it has an informational advantage in knowing the path of future monetary policy. We evaluate the Fed’s forecast advantage to determine how much of it results from the Fed’s knowledge of the conditioning path. We develop two tests—an instrumental variable encompassing test and a path-dependent encompassing test—to equalize the Fed’s information set with the private sector’s. We find that, generally, the Fed does not encompass the private sector when the latter has knowledge of the future of monetary policy. Further, we find that between 20 and 30 percent of the difference between the Fed’s average mean squared forecast error and the private sector’s can be explained by monetary policy.

Keywords: conditional encompassing; eurodollar futures; fed information;

JEL Classification: C36; C53; E47;

https://doi.org/10.20955/wp.2022.001

Access Documents

File(s): File format is application/pdf https://s3.amazonaws.com/real.stlouisfed.org/wp/2022/2022-001.pdf
Description: Full text

Authors

Bibliographic Information

Provider: Federal Reserve Bank of St. Louis

Part of Series: Working Papers

Publication Date: 2022-01

Number: 2022-001

Related Works