The Forecasts of Individual FOMC Members: New Evidence after Ten Years
Jaime Marquez () and
Sarp Kalfa ()
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Jaime Marquez: Johns Hopkins SAIS
No 2021-003, Working Papers from The George Washington University, Department of Economics, H. O. Stekler Research Program on Forecasting
A central tenet of Macroeconomics is that monetary policy is forward looking. But Romer (2010) uses the forecasts of the participants of the U.S. Federal Open Market Committeeâ€™s (FOMC) and shows a remarkable heterogeneity in these participantsâ€™ outlooks. What accounts for this forecast heterogeneity? And how can one reconcile the tension between the need for a single monetary and the heterogeneity of forecasts that are steering it? To study these two questions, we continue the line of work initiated by Romer (2010). We study two sources of heterogeneity: Institutional and Dynamic. Institutional Heterogeneity is about differences in participantsâ€™ education, voting status, and regional affiliation â€” and the associated implications for forecast rationality. Dynamic Heterogeneity is about herd behavior, extreme forecasts, temporal aggregation, and macroeconomic shocks. These factors emphasize that forecast heterogeneity is not a given constant but rather, that it changes in response to the alignment between private and social interests of the FOMC. We find that forecast revisions are large and remarkably heterogenous across participants. Specifically, the FOMCâ€™s forecast heterogeneity is systematically related to differences in participantsâ€™ education, voting status, and regional affiliation, as Romer anticipated. These results should not be surprising: heterogeneity is a built-in feature of the functioning of the Federal Reserve System and the role of the FOMC is to reconcile the differences. The reconciliation of private and public interests, and the implied heterogeneity of courses of action, involves a conversation in which the Chair gets the benefit of the doubt.
JEL-codes: C3 E5 (search for similar items in EconPapers)
Pages: 38 pages
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:gwc:wpaper:2021-003
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