Do Fed Forecast Errors Matter?

Pao-Lin Tien, Tara Sinclair and Edward Gamber ()
Additional contact information
Edward Gamber: Congressional Budget Office

No 2015-004, Wesleyan Economics Working Papers from Wesleyan University, Department of Economics

Abstract: There is a large literature evaluating forecasts by testing the rationality of forecasts and measuring the size of forecast errors, but we know little about the impact of forecast errors on economic outcomes. This paper constructs a measure of a forecast error shock for the Federal Reserve based on the assumption that the Fed follows a forward-looking Taylor rule. Given the effort the Fed puts towards producing forecasts that do not have an endogenous error component, this forecast error shock should be comparable to traditional monetary policy shocks and thus can be used to measure the impact of the Fed’s forecast errors on the U.S. economy. We follow Romer and Romer (2004) and investigate the effect of the forecast error shock on output and price movements. Our results suggest that although the magnitude of the forecast error shock is large, the impact of our shock on the macroeconomy is quite small. The impact is somewhat larger when we take into consideration the Fed’s inability to forecast recessions. The maximum impact across all potential models suggests a decline of approximately one percent of real GDP and two percent of GDP deflator in response to a one standard deviation contractionary forecast error shock.

Keywords: Federal Reserve; Taylor rule; forecast evaluation; monetary policy shocks (search for similar items in EconPapers)
JEL-codes: E31 E32 E52 E58 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2015-11
New Economics Papers: this item is included in nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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http://repec.wesleyan.edu/pdf/ptien/2015004_tien.pdf (application/pdf)

Related works:
Journal Article: Do Fed Forecast Errors Matter? (2021)
Working Paper: Do Fed Forecast Errors Matter? (2018)
Working Paper: Do Fed forecast errors matter? (2016)
Working Paper: Do Fed Forecast Errors Matter? (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:wes:weswpa:2015-004

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