Does the ROMC have expertise, and can it forecast?

Philip Hans Franses, Michael McAleer and Rianne Legerstee

No EI 2008-33, Econometric Institute Research Papers from Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute

Abstract: The primary purpose of the paper is to answer the following two questions regarding the performance of the influential Federal Open Market Committee (FOMC) of the Federal Reserve System, in comparison with the forecasts contained in the “Greenbooks” of the professional staff of the Board of Governors: Does the FOMC have expertise, and can it forecast better than the staff? The FOMC forecasts that are analyzed in practice are non-replicable forecasts. In order to evaluate such forecasts, this paper develops a model to generate replicable FOMC forecasts, and compares the staff forecasts, non-replicable FOMC forecasts, and replicable FOMC forecasts, considers optimal forecasts and efficient estimation methods, and presents a direct test of FOMC expertise on non-replicable FOMC forecasts. The empirical analysis of Romer and Romer (2008) is re-examined to evaluate whether their criticisms of the FOMC’s forecasting performance should be accepted unreservedly, or might be open to alternative interpretations.

Keywords: FOMC forecast; direct test of FOMC expertise; forecast performance; replicable FOMC; staff forecast (search for similar items in EconPapers)
Date: 2008-12-01
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Working Paper: Does the FOMC Have Expertise, and Can It Forecast? (2009)
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