Monetary Policy in Real Time

IGIER Working Paper No. 284

33 Pages Posted: 4 Apr 2005

See all articles by Domenico Giannone

Domenico Giannone

International Monetary Fund (IMF); Centre for Economic Policy Research (CEPR)

Lucrezia Reichlin

London Business School; Université Libre de Bruxelles (ULB) - European Center for Advanced Research in Economics and Statistics (ECARES); Centre for Economic Policy Research (CEPR); European Central Bank (ECB)

Luca Sala

University of Bocconi - Innocenzo Gasparini Institute for Economic Research (IGIER)

Multiple version iconThere are 2 versions of this paper

Date Written: March 2005

Abstract

We analyse the panel of the Greenbook forecasts (sample 1970-1996) and a large panel of monthly variables for the US (sample 1970-2003) and show that the bulk of dynamics of both the variables and their forecasts is explained by two shocks. Moreover, a two factor model which exploits, in real time, information on many time series to extract a two dimensional signal, produces a degree of forecasting accuracy of the federal funds rate similar to that of the markets, and, for output and inflation, similar to that of the Greenbook forecasts. This leads us to conclude that the stochastic dimension of the US economy is two. We also show that dimension two is generated by a real and nominal shock, with output mainly driven by the real shock and inflation by the nominal shock. The implication is that, by tracking any forecastable measure of real activity and price dynamics, the Central Bank can track all fundamental dynamics in the economy.

Keywords: Taylor rules, real time analysis, monetary policy, forecasting, large datasets

JEL Classification: E52, E58, C33, C53

Suggested Citation

Giannone, Domenico and Reichlin, Lucrezia and Sala, Luca, Monetary Policy in Real Time (March 2005). IGIER Working Paper No. 284, Available at SSRN: https://ssrn.com/abstract=680521 or http://dx.doi.org/10.2139/ssrn.680521

Domenico Giannone

International Monetary Fund (IMF) ( email )

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Centre for Economic Policy Research (CEPR)

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Lucrezia Reichlin

London Business School ( email )

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Centre for Economic Policy Research (CEPR)

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European Central Bank (ECB) ( email )

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Luca Sala (Contact Author)

University of Bocconi - Innocenzo Gasparini Institute for Economic Research (IGIER) ( email )

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