The Accuracy of Forecasts Prepared for the Federal Open Market Committee

FEDS Working Paper No. 2015-062

http://dx.doi.org/10.17016/FEDS.2015.062

25 Pages Posted: 25 Aug 2015

See all articles by Andrew C. Chang

Andrew C. Chang

Board of Governors of the Federal Reserve System

Tyler Hanson

Reverb.com

Date Written: July 9, 2015

Abstract

We analyze forecasts of consumption, nonresidential investment, residential investment, government spending, exports, imports, inventories, gross domestic product, inflation, and unemployment prepared by the staff of the Board of Governors of the Federal Reserve System for meetings of the Federal Open Market Committee from 1997 to 2008, called the Greenbooks. We compare the root mean squared error, mean absolute error, and the proportion of directional errors of Greenbook forecasts of these macroeconomic indicators to the errors from three forecasting benchmarks: a random walk, a first-order autoregressive model, and a Bayesian model averaged forecast from a suite of univariate time-series models commonly taught to first-year economics graduate students. We estimate our forecasting benchmarks both on end-of-sample vintage and real-time vintage data. We find find that Greenbook forecasts significantly outperform our benchmark forecasts for horizons less than one quarter ahead. However, by the one-year forecast horizon, typically at least one of our forecasting benchmarks performs as well as Greenbook forecasts. Greenbook forecasts of the personal consumption expenditures and unemployment tend to do relatively well, while Greenbook forecasts of inventory investment, government expenditures, and inflation tend to do poorly.

Keywords: Bayesian Model Averaging, Federal Open Market Committee, Forecast Accuracy, Greenbook, NIPA, National Income and Product Accounts, Real-Time Data

JEL Classification: C53, E17, E27, E37, F17

Suggested Citation

Chang, Andrew C. and Hanson, Tyler, The Accuracy of Forecasts Prepared for the Federal Open Market Committee (July 9, 2015). FEDS Working Paper No. 2015-062, http://dx.doi.org/10.17016/FEDS.2015.062, Available at SSRN: https://ssrn.com/abstract=2650601 or http://dx.doi.org/10.2139/ssrn.2650601

Andrew C. Chang (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Tyler Hanson

Reverb.com ( email )

Chicago, IL

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