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What's the Story? A New Perspective on the Value of Economic Forecasts

Steven Sharpe (), Nitish R. Sinha and Christopher A. Hollrah

No 2017-107, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (US)

Abstract: We apply textual analysis tools to measure the degree of optimism versus pessimism of the text that describes Federal Reserve Board forecasts published in the Greenbook. The resulting measure of Greenbook text sentiment, “Tonality,” is found to be strongly correlated, in the intuitive direction, with the Greenbook point forecast for key economic variables such as unemployment and inflation. We then examine whether Tonality has incremental power for predicting unemployment, GDP growth, and inflation up to four quarters ahead. We find it to have significant and substantive predictive power for both GDP growth and unemployment, particularly since 1991: higher (more optimistic) Tonality presages higher GDP growth and lower unemployment, relative to the Greenbook point forecasts. We then test whether Tonality helps predict monetary policy and stock returns. Higher Tonality has some power to predict tighter than forecasted monetary policy, while it has substantial power fo r predicting higher 3-month, 6-month, and 12-month stock market returns.

Keywords: Economic Forecasts; Monetary policy; Text Analysis (search for similar items in EconPapers)
JEL-codes: C53 E17 E27 E37 E52 G40 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-big, nep-for and nep-mac
Date: 2017-11-03, Revised 2018-08-20
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DOI: 10.17016/FEDS.2017.107r1

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