Can the Fed Predict the State of the Economy?
13 Pages Posted: 9 Dec 2009 Last revised: 14 Mar 2010
Date Written: March 2, 2010
Recent research has documented that the Federal Reserve produces systematic errors in forecasting inflation, real GDP growth, and the unemployment rate, even though these forecasts are unbiased. We show that these systematic errors reveal that the Fed is “surprised” by real and inflationary cycles. Using a modified Mincer-Zarnowitz regression, we show that the Fed knows the state of the economy for the current quarter, but cannot predict it one quarter ahead. We further show that even allowing for an asymmetric loss function the Fed does not appear to know the state of the economy one quarter ahead.
Keywords: Forecast Evaluation, Federal Reserve, Systematic Errors, Recessions
JEL Classification: C53, E37, E52, E58
Suggested Citation: Suggested Citation