What's the Story? A New Perspective on the Value of Economic Forecasts

58 Pages Posted: 5 Nov 2017 Last revised: 21 Feb 2019

See all articles by Steven A. Sharpe

Steven A. Sharpe

Federal Reserve Board - Research & Statistics

Nitish Ranjan Sinha

Board of Governors of the Federal Reserve System

Christopher Hollrah

Board of Governors of the Federal Reserve System

Date Written: 2017-11-03

Abstract

We apply textual analysis tools to measure the degree of optimism versus pessimism of the text that describes Federal Reserve Board forecasts published in the Greenbook. The resulting measure of Greenbook text sentiment, “Tonality,� is found to be strongly correlated, in the intuitive direction, with the Greenbook point forecast for key economic variables such as unemployment and inflation. We then examine whether Tonality has incremental power for predicting unemployment, GDP growth, and inflation up to four quarters ahead. We find it to have significant and substantive predictive power for both GDP growth and unemployment, particularly since 1991: higher (more optimistic) Tonality presages higher GDP growth and lower unemployment, relative to the Greenbook point forecasts. We then test whether Tonality helps predict monetary policy and stock returns. Higher Tonality has some power to predict tighter than forecasted monetary policy, while it has substantial power fo r predicting higher 3-month, 6-month, and 12-month stock market returns.

Keywords: Economic Forecasts, Monetary policy, Text Analysis

JEL Classification: C53, E17, E27, E37, E52, G40

Suggested Citation

Sharpe, Steven A. and Sinha, Nitish Ranjan and Hollrah, Christopher, What's the Story? A New Perspective on the Value of Economic Forecasts (2017-11-03). FEDS Working Paper No. 2017-107. Available at SSRN: https://ssrn.com/abstract=3065486 or http://dx.doi.org/10.17016/FEDS.2017.107r1

Steven A. Sharpe (Contact Author)

Federal Reserve Board - Research & Statistics ( email )

20th & C. St., N.W.
Washington, DC 20551
United States
202-452-2875 (Phone)
202-452-3819 (Fax)

Nitish Ranjan Sinha

Board of Governors of the Federal Reserve System ( email )

20th & C. St., N.W.
Washington, DC 20551
United States

Christopher Hollrah

Board of Governors of the Federal Reserve System ( email )

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

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