Forecasting and Policy Making (Paper) - Center for Financial Studies

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5 4 3 No Interest Rate Smoothing 2 Interest Rate 1 Outcomes 0 Forecasts 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 5 4 3 With Interest Rate Smoothing 2 Interest Rate 1 Outcomes 0 Forecasts 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Figure 3: Outcome- and forecast-based monetary policy rules: euro area 30
clear that all estimates for the euro area have to be treated with caution because they are surrounded by high uncertainty due to the short sample. Additional data is need. However, the point estimates suggest that forecasts of inflation and growth likely play a more important role for ECB decisions than recent nowcasts. Table 7: Policy Reactions to Forecasts and Outcomes: 2000-2010 no interest smoothing with interest smoothing φπ = φu φπ �= φu φπ = φu φπ �= φu φ 0.44 1.00 (0.00,0.78) (0.00,1.00) φπ 0.42 1.00 (0.00,1.00) (0.00,1.00) φy 0.48 1.00 (0.00,1.00) (0.12,1.00) R 2 0.67 0.67 0.95 0.95 ¯R 2 0.63 0.63 0.95 0.95 Notes: Parameters are estimated using nonlinear least squares. The parameters φ, φπ and φu are restricted to be in the range of 0 to 1. 95% confidence bands are shown in brackets and are computed using a moving block bootstrap with 5000 repetitions and a block size of 4 observations. While the empirical literature reviewed in this section as well as our own estimation results provided overwhelming evidence that interest-rate setting at the Federal Reserve is conducted in a forward-looking manner and also delivered some indications that it might also be true for the ECB, these findings do not give an answer to the question whether forecast-based policy is desirable. Poole (1971) notes that desirability of forecast-based policy certainly depends on the accuracy of the forecasts. Thus, we will investigate different technical procedures for computing forecasts in the next section and then review the accuracy of such model-based forecasts together with expert forecasts such as the Greenbook in section 6. Furthermore, the simple framework for understanding the interaction of forecasts and policy pre- sented previously in section 3 suggests that the relative performance of forecast- versus outcome-based rules also depend on the structure of the economy. We will return to this question in section 7. 5 Computing forecasts using macroeconomic models This section demonstrates how to use different forecasting methods ranging from non-structural sta- tistical approaches to model-based forecasts that take into account economic theory and empirical findings regarding the structure of the economy. Most central banks use a variety of forecasting tools that have different strengths and weaknesses. We divide these tools into four main categories: (i) non-structural time series methods; (ii) small-scale structural models of the New-Keynesian variety; (iii) medium-scale New-Keynesian Dynamic-Stochastic-General-Equilibrium (DSGE) models, and 31
Page 1 and 2: Forecasting and Policy Making ∗ V
Page 3 and 4: 1 Introduction Gouverner c’est pr
Page 5 and 6: to return to target within an accep
Page 7 and 8: In contrast to the CBO forecast the
Page 9 and 10: forecast and for the same projectio
Page 11 and 12: national central banks also publish
Page 13 and 14: In practice, central banks have not
Page 15 and 16: Item (v) on Tinbergen’s list requ
Page 17 and 18: ule and can also be expressed as a
Page 19 and 20: prescription within one quarter. Si
Page 21 and 22: By now there are several studies th
Page 23 and 24: of interest-rate-smoothing (ρ > 0.
Page 25 and 26: These findings provide evidence tha
Page 27 and 28: With the funds rate near zero, the
Page 29: These results suggest that rules wi
Page 33 and 34: use other available information tha
Page 35 and 36: VARs. The advantage of non-structur
Page 37 and 38: The notation of equations, variable
Page 39 and 40: ealizations. This state of the econ
Page 41 and 42: librium real interest rate, ηt a v
Page 43 and 44: 2 0 −2 −4 −6 x 104 1.4 1.2 1
Page 45 and 46: 1 0 −1 −2 2 1 0 −1 4 2 0 −2
Page 47 and 48: less flexible than, for example, mo
Page 49 and 50: 4 2 0 −2 Quarterly annualized inf
Page 51 and 52: Figure 13: The figure shows a histo
Page 53 and 54: at the Fed since 1996. Its characte
Page 55 and 56: Advantages and disadvantages of dif
Page 57 and 58: Adolfson et al. (2007a) and Maih (2
Page 59 and 60: ule, the dashed line the constant i
Page 61 and 62: 8 6 4 2 0 −2 −4 −6 −8 data
Page 63 and 64: 1 −1 1 −1 1 −1 1 −1 1 −1
Page 65 and 66: Figure 17 plots the p-values of the
Page 67 and 68: itself might be the crucial factor
Page 69 and 70: Figure 21 indicates that the recess
Page 71 and 72: Only for the 2008/2009 recession th
Page 73 and 74: We start by determining the optimal
Page 75 and 76: β β β 8 6 4 2 h π =0 0 0 0.5 1
Page 77 and 78: Table 11: Characteristics and Perfo
Page 79 and 80: Table 12: Characteristics and Perfo
Page 81 and 82:
are even less robust than the outco
Page 83 and 84:
Bernanke, B. S., 2009. Federal Rese
Page 85 and 86:
Edge, R. M., Kiley, M. T., Laforte,
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Hargreaves, D., 1999. SDS-FPS: A sm
Page 89 and 90:
Rotemberg, J. J., Woodford, M., 199
Page 91 and 92:
Wieland, V., 2010. Quantitative eas
Page 93 and 94:
new capital becomes effective with
Page 95:
6 4 2 0 −2 −2 7 6 5 4 3 2 Forec
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