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

Further below we review in more detail the forecasting methodology and processes of the Federal
Reserve staff, the Eurosystem staff and the Bank of England. A very useful though somewhat dated
overview of forecasting practices at central banks is given in Robertson (2000).
International institutions and private sector forecasts
Other important forecasts that receive considerable attention by governments and the press are the
International Monetary Fund’s (IMF) World Economic Outlook and the Organization for Economic
Cooperation and Development (OECD) Economic Outlook. The IMF’s World Economic Outlook
includes analysis and projections of the main macroeconomic aggregates for all IMF’s member coun-
tries and is published twice a year. It is an integral element of the IMF’s surveillance process. The
OECD’s Economic Outlook is a similar publication that covers the OECD member countries and is
also published twice a year.
Furthermore, there exist a variety of private sector forecasts that are frequently mentioned in
the press. Summaries of these forecasts in the form of surveys are informative for economic policy
decisions. They provide an indication of private sector expectations. Furthermore, averages of the
projections of many different forecasters often turn out more accurate than individual forecasts.
Examples include the Survey of Professional Forecasters that is conducted by the Philadelphia Fed
and the European counterpart that is conducted by the European Central Bank. Both surveys are
conducted quarterly.
The forecasting methodology of the Federal Reserve staff
The Federal Reserve staff produces forecasts prior to each of the eight FOMC meetings per year
with a forecast horizon of about two years. The forecasts provide a basis for discussions of the FOMC
members, but need not reflect their own views about future economic developments. The forecasts are
conditioned on a specific future time path for the federal funds rate – the primary policy instrument
of the FOMC. It is often assumed that the federal funds rate will be kept constant at the most recent
level. At other times a decreasing or increasing path is assumed, especially if a constant interest rate
path would be implausible. We will discuss different conditioning assumptions in detail in section
5.6.
As explained by Edge et al. (2010), Robertson (2000), and Reifschneider et al. (1997) the Federal
Reserve staff forecast is a judgmental projection that is derived from quantitative data, qualitative
information, different economic models, and various forecasting techniques. The forecast does not
result from a mechanical run of any large-scale macroeconometric model; nor is it derived directly
by add-factoring any such model. Instead, it relies heavily on the expertise of sector specialists and
senior advisers. The Federal Reserve’s structural macroeconomic model of the U.S. economy — the
so-called FRB/US model 7 — is only one of the tools used as an input into the deliberations that lead
to the Greenbook/Tealbook projection. According to the above-mentioned descriptions of the FRB
staff forecasting process, FRB/US model forecasts are prepared at the same time as each Greenbook
7 See Brayton and Tinsley (1996) and Reifschneider et al. (1999) for descriptions of the FRB/US model.
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