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

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law. Discretionary spending is assumed to continue at the level of the current years spending adjusted for inflation and other factors. CBOs baseline projections are not intended to be a forecast of future budgetary outcomes, but are supposed to serve as a neutral benchmark. In addition, CBO publishes alternative scenarios that include changes in future policies. In the European Union and the euro area fiscal policy is conducted by national governments. However, the European Commission provides forecasts in a publication called European Economic Forecast. Forecasts are published twice a year with some interim updates for the largest member states. Forecasts are computed for the individual countries, the euro area, the EU, candidate countries and some non-EU countries. The forecast covers 180 variables. Individual country forecasts are computed by country desks using different economic models and econometric tools. The forecasts for the euro area and the EU are constructed by aggregating the country forecasts. The government of the United Kingdom recently founded a new Office for Budget Responsibility (OBR) in May 2010 that is tasked to assess public finances for each government budget similar to the CBO in the United States. It produces economic and fiscal forecasts and evaluates the long-run sustainability of public finances. Similar to the CBO the OBR publishes reports analyzing the accuracy of its own forecasting record. Table 1: Examples of important forecasts US Euro Area UK International fiscal policy CBO: European Commission: Office for Budget Responsibility: Budget and Economic Outlook European Economic Forecast Economic and Fiscal Outlook monetary pol. FRB (staff): Euro System (staff): Bank of England: Greenbook/Tealbook FOMC: FOMC minutes Monthly Bulletin (ECB + National Central Banks) Inflation Report general Philadelphia Fed ECB IMF Survey of professional forecasters Forecasts for monetary policy purposes ECB Survey of Professional Forecasters World Economic Outlook OECD Economic Outlook The staff of the Federal Reserve Board (FRB) in Washington, DC provides a forecast of economic developments for every meeting of the Federal Open Market Committee (FOMC). This document used to be called the Greenbook due to its green cover and is nowadays referred to as the Tealbook. 5 5 Until summer 2010 forecasts and monetary policy alternatives were summarized in two different documents: the Green- book and the Bluebook. These are now merged in the Tealbook. 6
In contrast to the CBO forecast the FRB staff forecasts are confidential and only meant to inform the discussion among FOMC members. The forecasts are made available to the public with a five year lag. They are conditioned on a specific exogenous path for future central bank policy interest rates. An online archive of past Greenbook data sets is available from the Federal Reserve Bank of Philadelphia. In addition, the Federal Reserve publishes information on forecasts obtained via a regular poll of FOMC members, which include the Governors of the Federal Reserve System and the Presidents of the regional Federal Reserve Banks, prior to FOMC meetings. The semi-annual monetary policy reports to U.S. Congress (the so-called Humphrey-Hawkins reports) have presented information on the range and central tendency of FOMC members’ forecasts since 1979. Since November 2007 the FOMC has compiled and released these forecast ranges and central tendencies four times a year. The central tendency excludes the three highest and three lowest projections. FOMC members are asked to predict economic growth, the unemployment rate, and core and overall price inflation as measured by the personal consumption expenditures deflator (PCE). Prior to 1998 the inflation forecasts concerned the consumer price index (CPI). The FOMC members’ projections should be based on ”appropriate monetary policy” that is defined ”as the future path of policy that the participant deems most likely to foster outcomes for economic activity and inflation that best satisfy his or her interpretation of the Federal Reserves dual objectives of maximum employment and stable prices.” 6 The horizon of the forecasts used to be for the current and next year. Since November 2007, FOMC members are asked to provide a projection for an additional year into the future as well as a long-run projection. This long-run projection implicitly provides information on FOMC perceptions regarding long-run potential growth, the natural unemployment rate and the FOMC’s desired long-run inflation rate. As to the euro area, the Eurosystem staff—that is the staff of the European Central Bank (ECB) together with the staff of the national central banks—-prepare macroeconomic projections twice a year. Furthermore, the ECB’s staff prepares two additional projections per year so that euro area projections are available at a quarterly frequency. These projections serve as an input to the ECB Governing Council meetings and are made public afterwards in the ECB’s Monthly Bulletin. Variables that are forecast include HICP inflation, real GDP growth and its main components over a two-year horizon. Forecasts are conditioned on exogenous assumptions regarding policy interest rates and exchange rates. The projections are published in the form of ranges corresponding to 75% probability bands. At inflation-targeting central banks such as, for example, the Bank of England, the inflation forecast takes center stage in public policy communication. Their forecasts are not just staff, but official forecasts. They are published and discussed regularly with the aim of influencing and anchoring pri- vate sector expectations. For example announcing a certain inflation target and publishing an official forecast that illustrates that the central bank plans to do what is necessary to reach that target can induce price setters to adopt this forecast in their considerations. 6 See, for example, Minutes of the Federal Open Market Committee April 26-27, 2011, Summary of the Economic Projections, Page 1. 7
Page 1 and 2: Forecasting and Policy Making ∗ V
Page 3 and 4: 1 Introduction Gouverner c’est pr
Page 5: to return to target within an accep
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 and 30: These results suggest that rules wi
Page 31 and 32: clear that all estimates for the eu
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
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ule, the dashed line the constant i
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8 6 4 2 0 −2 −4 −6 −8 data
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1 −1 1 −1 1 −1 1 −1 1 −1
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Figure 17 plots the p-values of the
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itself might be the crucial factor
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Figure 21 indicates that the recess
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Only for the 2008/2009 recession th
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We start by determining the optimal
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β β β 8 6 4 2 h π =0 0 0 0.5 1
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Table 11: Characteristics and Perfo
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Table 12: Characteristics and Perfo
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are even less robust than the outco
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Bernanke, B. S., 2009. Federal Rese
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Edge, R. M., Kiley, M. T., Laforte,
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Hargreaves, D., 1999. SDS-FPS: A sm
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Rotemberg, J. J., Woodford, M., 199
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Wieland, V., 2010. Quantitative eas
Page 93 and 94:
new capital becomes effective with
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6 4 2 0 −2 −2 7 6 5 4 3 2 Forec
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