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A day late and a dollar short: The effect of policy uncertainty on fed forecast errors

Adam T. Jones and Richard E. Ogden

Economic Analysis and Policy, 2017, vol. 54, issue C, 112-122

Abstract: Policy makers at the Federal Reserve must make decisions on less than perfect information. To the extent their forecasts are incorrect, policy decisions will also be incorrect. Unfortunately, economic forecasters have a relatively poor record and have not improved as much as one would hope. The research presented in this paper examines one potential source of forecast improvement, economic policy uncertainty. Modeling emotional responses of economic agents to uncertainty is difficult but the inclusion of a policy uncertainty variable could reduce forecast errors of the FOMC’s consensus forecast by as much as 20%.

Keywords: Economic forecast; Policy uncertainty; Federal Reserve; FOMC (search for similar items in EconPapers)
JEL-codes: E37 E47 E58 (search for similar items in EconPapers)
Date: 2017
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Handle: RePEc:eee:ecanpo:v:54:y:2017:i:c:p:112-122