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Report
2013 Annual Report Why Inflation Is Very Low, and Why It Matters
One of the Federal Reserve?s mandates is maintaining stable prices. During my more than three decades in the Federal Reserve System, the focus has been primarily on avoiding high and variable inflation, and over most of that period, the Federal Reserve has successfully fulfilled its objective to keep inflation in check. More recently, however, our attention has turned to a less familiar concern?persistently low inflation. While high inflation has well-known costs for economic performance, the problems posed by persistently low inflation can be equally harmful. As its title promises, this ...
Journal Article
Forecasting implications of the recent decline in inflation
Should the unanticipated slowing of inflation that has occurred since early 2012 raise doubts about the reliability of inflation forecasts? We answer this question by conducting a few exercises with a common macroeconomic forecasting model. Our results indicate that even though inflation turned out to be much lower than forecasted, it still fell well within a normal range of uncertainty, and most of the deviation from the original forecast was a response to other economic developments.
Journal Article
Policy rules in macroeconomic forecasting models
This Commentary describes how some of the Cleveland Fed?s macroeconomic forecasting models have been modified to use a Taylor rule for monetary policy. After briefly describing the Taylor rule implementation, the article shows that the Taylor rule included in one of our models successfully captures the course of monetary policy in the most recent episode of policy tightening.
Journal Article
Food and energy price shocks: what other prices are affected?
Sharp rises in energy and other commodity prices have recently ignited concerns about inflation. Will these price increases spill over to other prices more generally? We study the typical responses of different price shocks and assess whether the recent behavior of producer and consumer prices is consistent with historical norms. Our analysis shows that the behavior of various producer and consumer prices since late 2009 has generally matched up with historical patterns. Overall, our findings suggest that effects of the recent energy and commodity price shocks on core consumer prices will be ...
Journal Article
Measuring Inflation Forecast Uncertainty
Looking across a range of statistical models, we consider the likely path of future inflation and the uncertainty surrounding the models' predictions. The models suggest that inflation is on a rising path, and while inflation forecast uncertainty is somewhat elevated relative to the norms of the last 20 years, core inflation uncertainty is relatively low. For both inflation rates, forecast uncertainty is much lower as of the first quarter of 2015 than it was around the Great Recession.
Journal Article
The Importance of Trend Inflation in the Search for Missing Disinflation
Some inflation-forecasting models based on the Phillips curve suggest that there should have been more disinflation since the Great Recession than has shown up in core PCE or core CPI data. One way researchers have found to make the disinflation disappear is to remove the long-term unemployed from the overall unemployment measure that is typically used in the models. This analysis shows that the disinflation arises in such models because of the way they account for the long-term trend in inflation. Under a different measurement of trend inflation, which historical forecast accuracy suggests ...
Journal Article
Credit Market Frictions, Business Cycles, and Monetary Policy: The Research Contributions of Charles Carlstrom and Timothy Fuerst
Charles Carlstrom and Timothy Fuerst were prolific and prominent research economists who, until their untimely deaths a few years ago, were long-associated with the Federal Reserve Bank of Cleveland. Their myriad contributions include the incorporation of financial market imperfections into macroeconomic models and the study of optimal monetary policy. We provide an overview of their work and summarize a few key themes from a research conference held in their honor.
Journal Article
The Impacts of Supply Chain Disruptions on Inflation
Since early 2021, inflation has consistently exceeded the Federal Reserve’s target of 2 percent. Using a combination of data, economic theory, and narrative information around historical events, we empirically assess what has caused persistently elevated inflation. Our estimates suggest that both aggregate demand and supply factors, including supply chain disruptions, have contributed significantly to high inflation.
Working Paper
Modeling Time-Varying Uncertainty of Multiple-Horizon Forecast Errors
We develop uncertainty measures for point forecasts from surveys such as the Survey of Professional Forecasters, Blue Chip, or the Federal Open Market Committee?s Summary of Economic Projections. At a given point of time, these surveys provide forecasts for macroeconomic variables at multiple horizons. To track time-varying uncertainty in the associated forecast errors, we derive a multiple-horizon specification of stochastic volatility. Compared to constant-variance approaches, our stochastic-volatility model improves the accuracy of uncertainty measures for survey forecasts.
Working Paper
Bayesian VARs: specification choices and forecast accuracy
In this paper we examine how the forecasting performance of Bayesian VARs is affected by a number of specification choices. In the baseline case, we use a Normal-Inverted Wishart prior that, when combined with a (pseudo-) iterated approach, makes the analytical computation of multi-step forecasts feasible and simple, in particular when using standard and fixed values for the tightness and the lag length. We then assess the role of the optimal choice of the tightness, of the lag length and of both; compare alternative approaches to multi-step forecasting (direct, iterated, and ...