Using Forecasts to Uncover the Loss Function of Federal Open Market Committee Members

Pierdzioch, Christian; Rülke, Jan-Christoph; Tillmann, Peter

doi:10.1017/s1365100514000625

Cited by 14 publications

(9 citation statements)

References 38 publications

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“…McCracken (2010) argues that FOMC members have an incentive to forecast strategically; that is, they submit forecasts in line with their preferences of being either an inflation hawk (higher desired interest rates)-possibly leading to higher individual inflation forecasts-or an inflation "dove" (lower desired interest rates)-possibly leading to lower individual inflation forecasts regardless of the stance of the economy. Pierdzioch, Ruelke, and Tillmann (2013) find an asymmetric loss function among FOMC members derived from individual forecasts. However, they conclude that individual forecasts remain biased even when controlling for a specific functional form.…”

Section: Introductionmentioning

confidence: 86%

Regional, individual and political determinants of FOMC members' key macroeconomic forecasts

Eichler

Lähner²

2017

Journal of Forecasting

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We study Federal Open Market Committee members' individual forecasts of inflation and unemployment in the period 1992-2004. Our results imply that Governors and Bank presidents forecast differently, with Governors submitting lower inflation and higher unemployment rate forecasts than bank presidents. For Bank presidents we find a regional bias, with higher district unemployment rates being associated with lower inflation and higher unemployment rate forecasts. Bank presidents' regional bias is more pronounced during the year prior to their elections or for nonvoting bank presidents. Career backgrounds or political affiliations also affect individual forecast behavior. KEYWORDS FOMC, individual characteristics, individual forecasts, regional bias | INTRODUCTIONWe analyze the forecast determinants of Federal Open Market Committee (FOMC) members. Individual forecasts of key macroeconomic factors (such as unemployment and inflation rates) are crucial indicators for determining optimal monetary policy when a forward-looking policy rule is considered. 1 Since the FOMC is a committee consisting of 12 voting members (seven members of the Board of Governors (BoG) 2 and five voting regional Federal Reserve Bank presidents), disagreement about the optimal monetary policy stance (as shown in many studies) not only leads to dissenting votes in the FOMC but may also lead to dispersion of forecasts among FOMC members. Thus analyzing the determinants of real-time inflation and unemployment rate forecasts may improve our understanding of differences in the monetary policy preferences among FOMC members. This paper aims to analyze the determinants of FOMC members' individual inflation and unemployment rate forecasts in the period 1992-2004. We add to the existing literature not only by considering a broadest set of potential regional, individual, and political characteristics, but also by testing determinants (such as career backgrounds, electoral cycles, political affiliation) not previously considered in the FOMC forecasting literature. Our results indicate considerable differences in the economic forecasts between Governors and Bank presidents. Moreover, forecasts of Bank presidents are influenced by the unemployment rate in their 1 Haldane and Batini (1999), as well as Rudebusch and Svensson (1999), compare monetary policy rules and conclude that forward-looking rules including forecasts of inflation instead of actual values can improve monetary policy performance relative to a simple benchmark rule (such as proposed in Taylor, 1993). Clarida, Gali, and Gertler (1998) find that so-called G3 central banks (Germany, Japan, USA) implicitly have followed a type of inflation-targeting regime since 1979, and thus all three central banks indirectly applied a forward-looking framework. Orphanides (2003) find periods -such as during the 1970s or mid-1990s-when a forecast-based rule did an even better job in describing FOMC's monetary policy. Orphanides and Wieland (2008) use a forecast-based Taylor rule framework and conclude...

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Section: Introductionmentioning

confidence: 86%

Regional, individual and political determinants of FOMC members' key macroeconomic forecasts

Eichler

Lähner²

2017

Journal of Forecasting

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“…Hence, whenever strategic motives are present, individual forecasts may not be unbiased indications of the "true" preferences of an individual member. A recent paper by Pierdzioch, Ruelke and Tillmann (2013) examines the sources of a forecast bias in the FOMC members' forecasts and finds that the bias is rather persistent, yet unrelated to policymakers' preferences.…”

Section: Forecastsmentioning

confidence: 99%

Does the Greenspan era provide evidence on leadership in the FOMC?

El‐Shagi

Jung

2015

Journal of Macroeconomics

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. In 2013 all ECB publications feature a motif taken from the €5 banknote. Terms of use: Documents in EconStor may

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“…To this end, I build on research by Elliott et al (2005Elliott et al ( , 2008, who study optimal forecasts under asymmetric loss. The seminal work in this field by Granger (1969), Varian (1974), and Zellner (1986) as well as early applications Diebold 1996, 1997) have recently been applied in several fields such as financial forecasting (Aretz et al 2011;Fritsche et al 2015), fiscal forecasting (Artis and Marcellino 2001;Elliott et al 2005), central banking (e.g., Capistrán 2008;Pierdzioch et al 2016a), as well as GDP and inflation forecasting (Christodoulakis and Mamatzakis 2008;Pierdzioch et al 2016b;Sun et al 2018). The basic assumption in this field of research is an asymmetric loss function.…”

Section: Introductionmentioning

confidence: 99%

A Nonparametric Evaluation of the Optimality of German Export and Import Growth Forecasts under Flexible Loss

Behrens

2019

Economies

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This study contributes to research on the nonparametric evaluation of German trade forecasts. To this end, I compute random classification and regression forests to analyze the optimality of annual German export and import growth forecasts from 1970 to 2017. A forecast is considered as optimal if a set of predictors, which models the information set of a forecaster at the time of forecast formation, has no explanatory power for the corresponding (sign of the) forecast error. I analyze trade forecasts of four major German economic research institutes, a collaboration of German economic research institutes, and one international forecaster. For trade forecasts with a horizon of half-a-year, I cannot reject forecast optimality for all but one forecaster. In the case of a forecast horizon of one year, forecast optimality is rejected in more cases if the underlying loss function is assumed to be quadratic. Allowing for a flexible loss function results in more favorable assessment of forecast optimality.

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Using Forecasts to Uncover the Loss Function of Federal Open Market Committee Members

Cited by 14 publications

References 38 publications

Regional, individual and political determinants of FOMC members' key macroeconomic forecasts

Regional, individual and political determinants of FOMC members' key macroeconomic forecasts

Does the Greenspan era provide evidence on leadership in the FOMC?

A Nonparametric Evaluation of the Optimality of German Export and Import Growth Forecasts under Flexible Loss

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