Is the Fed's News Perception Different from the Private Sector's?

Abstract

The recent literature on monetary policy has dedicated considerable attention to modeling agents' processing of information about the future in real time. This paper contributes to this growing strand by investigating the implied differences in the so-called news shocks estimated from the standard New Keynesian dynamic stochastic general equilibrium (DSGE) model using the real-time datasets from the Survey of Professional Forecasters (SPF) and the Federal Reserve's Greenbook (GB) forecasts. These specifications with the SPF and GB forecasts aim to model the private sector's and the Fed's expectations of future macroeconomic outcomes and aid with the identification of news shocks. Our results indicate that while the demand news shocks have very similar distributions in the two datasets, the monetary and supply news shocks from the models estimated on the GB data tend to be larger than those from the SPF. These findings suggest that the Federal Reserve's forecasting methods allow for more variation in future outcomes than the SPF's. These findings mesh well with the extant literature on the superiority of the Fed's forecasts relative to the private sector's and provide a structural explanation for the source of this superiority.