Time-dependent Bias in the Fed's Greenbook Forecasts

• Activity Number: 23
• Type: Topic Contributed
• Date/Time: Sunday, August 9, 2015 : 2:00 PM to 3:50 PM
• Sponsor: Business and Economic Statistics Section
• Author(s): Frederick Joutz* and Neil R. Ericsson and Tara Sinclair
• Companies: and Federal Reserve Board and The George Washington University
• Keywords: Forecast Evaluation ; Business Cycle ; Greenbook ; Impulse Indicator Saturation ; Federal Reserve Board ; United States

Abstract

Abstract: Building on Sinclair, Joutz, and Stekler (2010), this paper examines the Federal Reserve Board's Greenbook forecasts of U.S. output growth, inflation, and the unemployment rate for potential biases. Standard tests typically fail to detect biases in one-quarter-ahead forecasts. However, impulse indicator saturation (IIS) detects economically large and highly significant time-varying biases. Biases depend on the variable being forecast and the phase of the business cycle. IIS defines a generic procedure for examining forecast properties, it explains why standard tests fail to detect bias, and it provides a potential mechanism for improving forecasts.