Forecast Errors Before and After the Great Moderation

Edward N. Gamber (), Julie Smith and Matthew Weiss ()
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Edward N. Gamber: Lafayette College
Matthew Weiss: Brooklyn Law School

No 2008-001, Working Papers from The George Washington University, Department of Economics, H. O. Stekler Research Program on Forecasting

Abstract: This paper investigates the change in private-sector and Federal Reserve forecasts before and after the Great Moderation. We view the Great Moderation as a natural experiment. Using forecasts produced by the Survey of Professional Forecasters and the Federal Reserve (Greenbook forecasts) we investigate four questions: 1) How large was the decline in forecast errors? 2) Did forecast accuracy improve relative to the decline in volatility of growth and inflation? 3) Did forecasters respond to the Great Moderation? 4) What are the potential benefits to monetary policymakers of smaller forecast errors? We find that the absolute median error as well as the cross-sectional volatility of forecast errors decreased significantly. Forecasters appeared to have narrowed the dispersion of their forecasts in response to the Great Moderation. Forecast accuracy did not improve relative to the reduction in the volatility of the economy. To the extent that the Fed is forward-looking when it sets its federal funds rate target, improvements in forecast accuracy imply substantial improvements in the Fed’s ability to reach its optimum federal funds rate target.

Keywords: forecast errors; Greenbook; Survey of Professional Forecasters; Great Moderation (search for similar items in EconPapers)
JEL-codes: E31 E32 E37 (search for similar items in EconPapers)
Date: 2008, Revised 2009-03
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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