23 – The Fed's Forecasts
Time-dependent Bias in the Fed's Greenbook Forecasts
Neil R. Ericsson
Federal Reserve Board
Stedman B. Hood
PlateJoy
Frederick Joutz
The George Washington University
Tara M. Sinclair
The George Washington University
Herman O. Stekler
The George Washington University
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.