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Working Paper
How Biased Are U.S. Government Forecasts of the Federal Debt?
Government debt and forecasts thereof attracted considerable attention during the recent financial crisis. The current paper analyzes potential biases in different U.S. government agencies? one-year-ahead forecasts of U.S. gross federal debt over 1984-2012. Standard tests typically fail to detect biases in these forecasts. However, impulse indicator saturation (IIS) detects economically large and highly significant time-varying biases, particularly at turning points in the business cycle. These biases do not appear to be politically related. IIS defines a generic procedure for examining ...
Working Paper
Risk Management in Monetary Policymaking: The 1994-95 Fed Tightening Episode
The 1994-95 Fed tightening episode was one of the most notable in the Fed’s history. First, the FOMC raised the policy rate by 300 basis points in a year, even though headline and core inflation were trending lower prior to the liftoff that occurred in February 1994. Second, the Fed’s actions caught the Treasury market by surprise, triggering a sharp decline in long-term bond prices. Third, Fed Chair Alan Greenspan and the Federal Open Market Committee were regularly surprised that inflation was not rising by more than the forecasts suggested during the episode. This article presents some ...
Newsletter
Economic Outlook Symposium: Summary of 2014 Results and 2015 Forecasts
According to participants in the Chicago Fed?s annual Economic Outlook Symposium, the U.S. economy is forecasted to grow at a pace slightly above average in 2015, with inflation ticking lower and the unemployment rate edging down.
Challenges in Nowcasting GDP Growth
Real gross domestic product (GDP) declined at an annualized rate of 4.8 percent in the first quarter, according to the first estimate from the U.S. Bureau of Economic Analysis (BEA), 3.8 percentage points more than the decline anticipated by the Atlanta Fed's final GDPNow model projection. Why was the error, which was easily the model's largest on record for final GDPNow forecasts, so big? Chart 1 looks at GDPNow's forecast errors since the model went live in mid-2014 and breaks them down into forecast errors for the various subcomponents' contributions to GDP growth.
Discussion Paper
A Bayesian VAR Model Perspective on the Lagged Effect of Monetary Policy
Over the last few years, the U.S. economy has experienced unusually high inflation and an unprecedented pace of monetary policy tightening. While inflation has fallen recently, it remains above target, and the economy continues to expand at a robust pace. Does the resilience of the U.S. economy imply that monetary policy has been ineffectual? Or does it reflect that policy acts with “long and variable lags” and so we haven’t yet observed the full effect of the monetary tightening that has already taken place? Using a Bayesian vector autoregressive (BVAR) model, we show that economic ...
Journal Article
The Likelihood of 2 Percent Inflation in the Next Three Years
This Commentary examines inflation forecasts generated from a range of statistical models that historically have performed well at forecasting inflation. For each model, we look at the most likely future forecast path and the distribution of forecasts around that path. We show that the models project generally rising inflation, but, in contrast to other forecasts, five out of six models assign a less than 50 percent probability to inflation?s being 2 percent or higher over the next three years.
Working Paper
The Fed's Response to Economic News Explains the “Fed Information Effect”
High-frequency changes in interest rates around FOMC announcements are a standard method of measuring monetary policy shocks. However, some recent studies have documented puzzling effects of these shocks on private-sector forecasts of GDP, unemployment, or inflation that are opposite in sign to what standard macroeconomic models would predict. This evidence has been viewed as supportive of a “Fed information effect” channel of monetary policy, whereby an FOMC tightening (easing) communicates that the economy is stronger (weaker) than the public had expected. We show that these empirical ...
Discussion Paper
The Central Banking Beauty Contest
Expectations can play a significant role in driving economic outcomes, with central banks factoring market sentiment into policy decisions and market participants forming their own assumptions about monetary policy. But how well do central banks understand the expectations of market participants—and vice versa? Our model, developed in a recent paper, features a dynamic game between (i) a monetary authority that cannot commit to an inflation target and (ii) a set of market participants that understand the incentives created by that credibility problem. In this post, we describe the game, a ...
Journal Article
To Improve the Accuracy of GDP Growth Forecasts, Add Financial Market Conditions
More timely data on current macroeconomic conditions can reduce uncertainty about forecasts, helping policymakers mitigate the risk of extreme economic outcomes. We find that incorporating financial market conditions along with current macroeconomic conditions improves the forecast accuracy of future GDP growth. Forecasts based only on current macroeconomic conditions eventually converge to those incorporating financial market conditions, lending further support to this approach.