(Un)Predictability and Macroeconomic Stability
43 Pages Posted: 24 Apr 2006
Date Written: April 2006
This paper documents a new stylized fact of the greater macroeconomic stability of the U.S. economy over the last two decades. Using 131 monthly time series, three popular statistical methods and the forecasts of the Federal Reserve's Greenbook and the Survey of Professional Forecasters, we show that the ability to predict several measures of inflation and real activity declined remarkably, relative to naive forecasts, since the mid-1980s. This break down in forecast ability appears to be an inherent feature of the most recent period and thus represents a new challenge for competing explanations of the 'Great Moderation'.
Keywords: predictive accuracy, macroeconomic stability, forecasting models, sub-sample analysis, Fed Greenbook
JEL Classification: E37, E47, C22, C53
Suggested Citation: Suggested Citation