Working Paper: CEPR ID: DP7510
Authors: Martin Ellison; Thomas J. Sargent
Abstract: We defend the forecasting performance of the FOMC from the recent criticism of Christina and David Romer. Our argument is that the FOMC forecasts a worst-case scenario that it uses to design decisions that will work well enough (are robust) despite possible misspecification of its model. Because these FOMC forecasts are not predictions of what the FOMC expects to occur under its model, it is inappropriate to compare their performance in a horse race against other forecasts. Our interpretation of the FOMC as a robust policymaker can explain all the findings of the Romers and rationalises differences between FOMC forecasts and forecasts published in the Greenbook by the staff of the Federal Reserve System.
Keywords: forecasting; monetary policy; robustness
JEL Codes: C53; E52; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| FOMC forecasts (E52) | systematic bias in forecasts (C53) |
| FOMC's concerns about model misspecification (C50) | influences policy decisions (D78) |
| forecast differences (C53) | predict monetary policy actions (E52) |
| FOMC's forecasting approach (E47) | biases in inflation and unemployment forecasts (E27) |