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Working Paper
Measurement Error in Macroeconomic Data and Economics Research: Data Revisions, Gross Domestic Product, and Gross Domestic Income
We analyze the effect of measurement error in macroeconomic data on economics research using two features of the estimates of latent US output produced by the Bureau of Economic Analysis (BEA). First, we use the fact that the BEA publishes two theoretically identical estimates of latent US output that only differ due to measurement error: the more well-known gross domestic product (GDP), which the BEA constructs using expenditure data, and gross domestic income (GDI), which the BEA constructs using income data. Second, we use BEA revisions to previously published releases of GDP and GDI. ...
Working Paper
How Well Does Economic Uncertainty Forecast Economic Activity?
Despite the enormous reach and influence of the literature on economic and economic policy uncertainty, one surprisingly under-researched topic has been the forecasting performance of economic uncertainty measures. We evaluate the ability of seven popular measures of uncertainty to forecast in-sample and out-of-sample over real and financial outcome variables. We also evaluate predictive content over different quantiles of the GDP growth distribution. Real-time data and estimation considerations are highly consequential, and we devote considerable attention to them. Four main findings ...
Working Paper
Time-varying Uncertainty of the Federal Reserve’s Output Gap Estimate
A factor stochastic volatility model estimates the common component to estimates of the output gap produced by the staff of the Federal Reserve, its time-varying volatility, and time-varying, horizon-specific forecast uncertainty. Output gap estimates are very uncertain, even well after the fact, especially at business cycle turning points. However, the common component of the output gap estimates is clearly procyclical, and innovations to the common factor produce persistent positive effects on economic activity. Output gaps estimated by the Congressional Budget Office have very similar ...
Working Paper
Time-varying Uncertainty of the Federal Reserve’s Output Gap Estimate
What is the output gap and when do we know it? A factor stochastic volatility model estimates the common component to forecasts of the output gap produced by the staff of the Federal Reserve, its time-varying volatility, and time-varying, horizon-specific forecast uncertainty. The common factor to these forecasts is highly procyclical, and unexpected increases to the common factor are associated with persistent responses in other macroeconomic variables. However, output gap estimates are very uncertain, even well after the fact. Output gap uncertainty increases around business cycle turning ...
Working Paper
Raiders of the Lost High-Frequency Forecasts: New Data and Evidence on the Efficiency of the Fed's Forecasting
We introduce a new dataset of real gross domestic product (GDP) growth and core personal consumption expenditures (PCE) inflation forecasts produced by the staff of the Board of Governors of the Federal Reserve System. In contrast to the eight Greenbook forecasts a year the staff produces for Federal Open Market Committee (FOMC) meetings, our dataset has roughly weekly forecasts. We use these new data to study whether the staff forecasts efficiently and whether efficiency, or lack thereof, is time-varying. Prespecified regressions of forecast errors on forecast revisions show that the staff's ...
Working Paper
Which Output Gap Estimates Are Stable in Real Time and Why?
Output gaps that are estimated in real time can differ substantially from those estimated after the fact. We aim to understand the real-time instability of output gap estimates by comparing a suite of reduced-form models. We propose a new statistical decomposition and find that including a Okun’s law relationship improves real-time stability by alleviating the end-point problem. Models that include the unemployment rate also produce output gaps with relevant economic content. However, we find that no model of the output gap is clearly superior to the others along each metric we consider.
Working Paper
Combining Survey Long-Run Forecasts and Nowcasts with BVAR Forecasts Using Relative Entropy
This paper constructs hybrid forecasts that combine both short- and long-term conditioning information from external surveys with forecasts from a standard fixed-coefficient vector autoregression (VAR) model. Specifically, we use relative entropy to tilt one-step ahead and long-horizon VAR forecasts to match the nowcast and long-horizon forecast from the Survey of Professional Forecasters. The results indicate meaningful gains in multi-horizon forecast accuracy relative to model forecasts that do not incorporate long-term survey conditions. The accuracy gains are achieved for a range of ...
Working Paper
Nowcasting U.S. Headline and Core Inflation
Forecasting future inflation and nowcasting contemporaneous inflation are difficult. We propose a new and parsimonious model for nowcasting headline and core inflation in the U.S. price index for personal consumption expenditures (PCE) and the consumer price index (CPI). The model relies on relatively few variables and is tested using real-time data. The model?s nowcasting accuracy improves as information accumulates over the course of a month or quarter, and it easily outperforms a variety of statistical benchmarks. In head-to-head comparisons, the model?s nowcasts of CPI infl ation ...
Working Paper
Frequency Dependence in a Real-Time Monetary Policy Rule
We estimate a monetary policy rule for the US allowing for possible frequency dependence?i.e., allowing the central bank to respond differently to more persistent innovations than to more transitory innovations, in both the unemployment rate and the inflation rate. Our estimation method uses real-time data in these rates?as did the FOMC?and requires no a priori assumptions on the pattern of frequency dependence or on the nature of the processes generating either the data or the natural rate of unemployment. Unlike other approaches, our estimation method allows for possible feedback in the ...
Working Paper
Forecasting GDP Growth with NIPA Aggregates
Beyond GDP, which is measured using expenditure data, the U.S. national income and product accounts (NIPAs) provide an income-based measure of the economy (gross domestic income, or GDI), a measure that averages GDP and GDI, and various aggregates that include combinations of GDP components. This paper compiles real-time data on a variety of NIPA aggregates and uses these in simple time-series models to construct out-of-sample forecasts for GDP growth. Over short forecast horizons, NIPA aggregates?particularly consumption and GDP less inventories and trade?together with these simple ...