Greenbook Forecasts Research Articles

Estimating Expected Asset Returns with the Present Value Model of Consumption and Fed Forecasts

Abstract This paper utilizes Greenbook forecasts of consumption and income to estimate expected asset returns through a present value model of consumption. The study finds that, despite the valuable information contained in Greenbook forecasts, the expected asset returns obtained from this approach do not provide meaningful insights into future asset returns. This contrasts with previous literature suggesting predictability using the present-value model.

Macroeconomic News in Asset Pricing and Reality

ABSTRACTRevisions in successive Greenbook forecasts of quarterly real GDP growth proxy for news of current and expected future economic growth. In the sample 1975 through 2015, news of future growth is slightly negatively related to contemporaneous changes in Treasury bond yields, while news of current growth is strongly positively related to changes in these yields. Both results are difficult to reconcile with a representative agent's bondholding first‐order condition. A continuous‐time dynamic model of output attributes almost all of the covariation with yields to martingale innovations in log output and a minimal amount to innovations in the conditional drift of log output.

Overconfidence of the chair of the Federal Reserve and market expectations: Evidence based on media coverage

AbstractThis paper examines the relationship between the overconfidence expressed by the chair of the US Federal Reserve and financial market expectations. I first use a media‐based proxy to compute a measure of Fed chair's overconfidence for the period 1999M01–2017M07, the overconfidence indicator. The overconfidence indicator provides a quantitative measure of the overconfidence expressed by the Fed chair, which is covered by the media, and thus, perceived by financial market participants. I relate this variable to inflation and unemployment expectations of market participants. Our results show that an overconfident Fed chair is significantly associated with higher inflation expectations and lower unemployment expectations. These findings are robust to (i) the macroeconomic forecasts used to extract the exogenous component of the media‐based proxy reflecting Fed chair's overconfidence (the Survey of Professional Forecasters and the Greenbook forecasts) and (iii) an alternative proxy of inflation expectations. These findings shed some new light on the impact of central bankers' communication on financial market expectations, and thus, on the effectiveness of their monetary policy decisions.

Monetary policy news and systemic risk at the zero lower bound

AbstractThis paper employs a recent contribution to the construction of the shadow nominal interest rate during the zero lower bound episode and Greenbook forecasts to obtain a measure of monetary policy shocks over that time period. It then identifies monetary policy news shocks as a novel measure of the forward‐looking conduct of monetary policy in the U.S. Using the data from 1987—2010, it shows that neither monetary news nor surprises affected alternative measures of systemic risk over the full sample. However, monetary news shocks announcing future reductions in interest rates were effective in lowering most (but not all) systemic risk measures during the zero lower bound period, unlike monetary surprises.

GDP forecasts: Informational asymmetry of the SPF and FOMC minutes

This paper emphasizes asymmetric information about the U.S. economy between the FOMC and SPF. Following Stekler and Symington (2016), it extends their text-based FOMC minutes index (FMI) of economic outlook to 1986-2016. Following Ericsson (2016), it employs truncation adjustment indicators and reinterprets the FMI calibrations as the policy-makers forecasts of the GDP growth, which carry information about the staff Greenbook forecasts prepared prior to the bi-quarterly FOMC meetings. Tests confirm unbiasedness and rationality of these forecasts. The encompassing tests indicate that both the FMI and SPF forecasts contain unique information beyond their alternative’s information set and can be weighted equally. The orthogonality tests suggest that the SPF efficiently use all their information set but could gain if the FOMC minutes were published without a lag, while the policy-makers rely mostly on their projections made earlier in the meetings, and could benefit from incorporating the already published SPF forecasts.

Is the future really observable? A practical approach to model monetary policy rules

We take a practical approach to model the forward-looking monetary policy rule. Unlike existing studies, we recognize that the forward-looking components—future inflation and output growth—are intrinsically unobserved at the time policy formulation. Using the unobserved components framework, we extract the latent components of the policy rule from the short-term and long-term Greenbook forecasts, both individually and in combination, and jointly estimate the policy parameters. We also consider correlations between different components and combine the forecasts from the survey of professional forecasters and the inflation index bonds market. Evidence suggests that the Federal Reserve follows an inflation-tilted policy rule and the long-term state of economy gets a higher weight than the short term. Also, the policy reaction is more aggressive when interconnections between different components of the policy rule are considered.

US monetary policy and global banking flows

This note investigates the impact of US monetary policy on US global bank leverage and cross-border US dollar denominated banking flows, using US monetary policy shocks identified based on narrative sources and the Federal Reserve’s Greenbook forecasts (Romer and Romer, 2004). Compared to Bruno and Shin (2015), who employ standard recursive monetary policy identification techniques, we find that leverage declines more quickly and to a much larger extent after a monetary tightening, suggesting that declines in the availability of debt finance play a significant role in the propagation of monetary policy via the banking system. The decline in international flows of dollar denominated bank funding is also larger using the externally identified monetary policy measure, as is the degree of US dollar appreciation. By expanding the baseline model into bilateral VARs for 36 countries, we find that the retrenchment of cross-border banking flows after US monetary contraction is much larger in response to the externally identified monetary policy shocks, which is consistent with the results of the aggregate model. By looking at country groups, it is observed that banking outflows after US monetary contraction are more pronounced in the case of emerging market economies than in the case of advanced economies.

Estimating Excess Sensitivity and Habit Persistence in Consumption Using Greenbook Forecasts

AbstractIn this paper, we revisit the issue of excess sensitivity of consumption to income and address the weak instrument problem that is well documented in this literature. Using quarterly data for the US economy, we first highlight the weak instrument problem by showing that the use of conventional instruments tends to overestimate the share of rule‐of‐thumb consumers. To address this weak instrument problem, we propose a new instrument for endogenous disposable income growth in the consumption function, namely, the Greenbook forecast of real disposable income growth. We show that this instrument encompasses the information contained in the conventional set of instruments, and is a superior predictor of income growth. We find that using our proposed instrument ameliorates the weak instrument problem and provides a much smaller estimate for the rule‐of‐thumb consumers. We also extend our empirical framework to allow for habit persistence and provide an estimate for this important parameter of the consumption function. Finally, we use a time‐varying specification of consumption function that allows for endogenous regressors, and document a decline in the share of rule‐of‐thumb consumers and a rise in the habit‐persistence parameter in the US over our sample period.

Rules versus Discretion: Inference Gleaned from Greenbook Forecasts and FOMC Decisions

AbstractFrom 1987 through 2013, the Federal Open Market Committee appears to have set its federal funds rate target with reference to Greenbook forecasts of the output gap and inflation and, at times, also to have made further adjustments to the funds rate as those forecasts were revised. If viewed in the context of the Taylor (1993) Rule, discretionary departures from the settings prescribed by Greenbook forecasts consistently presage business cycle turning points. Similarly, estimates from an interest rate rule with time‐varying parameters imply that, around such turning points, the FOMC responds less vigorously to information contained in Greenbook forecasts about the changing state of the economy. These results suggest possible gains from closer adherence to a rule with constant parameters.

Testing Forecast Rationality for Measures of Central Tendency

Rational respondents to economic surveys may report as a point forecast any measure of the central tendency of their (possibly latent) predictive distribution, for example the mean, median, mode, or any convex combination thereof. We propose tests of forecast rationality when the measure of central tendency used by the respondent is unknown. We overcome an identification problem that arises when the measures of central tendency are equal or in a local neighborhood of each other, as is the case for (exactly or nearly) symmetric distributions. As a building block, we also present novel tests for the rationality of mode forecasts. We apply our tests to survey forecasts of individual income, Greenbook forecasts of U.S. GDP, and random walk forecasts for exchange rates. We find that the Greenbook and random walk forecasts are best rationalized as mean, or near-mean forecasts, while the income survey forecasts are best rationalized as mode forecasts.

Asymmetry, Complementarities, and State Dependence in Federal Reserve Forecasts

AbstractForecasts are a central component of policymaking; the Federal Reserve's forecasts are published in a document called the Greenbook. Previous studies of the Greenbook's inflation forecasts have found them to be rationalizable but asymmetric if considering particular subperiods, for example, before and after the Volcker appointment. In these papers, forecasts are analyzed in isolation, assuming policymakers value them independently. We analyze the Greenbook forecasts in a framework in which the forecast errors for different variables are allowed to interact. We find that allowing the losses to interact makes the unemployment forecasts virtually symmetric, the output forecasts symmetric prior to the Volcker appointment, and the inflation forecasts symmetric after the onset of the Great Moderation.

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

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.

Is the Fed’s news perception different from the private sector’s?

ABSTRACTThe recent literature on monetary policy has dedicated considerable attention to modelling 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 data sets from the Survey of Professional Forecasters (SPF) and the Federal Reserve’s Greenbook (GB) forecasts. Alternative specifications with either the SPF or GB forecasts aim to delineate the differences in the private sector’s and the Fed’s expectations of future macroeconomic outcomes and identify the differences in their perception of news shocks. Our results indicate that while the demand news shocks have very similar distributions in the two datasets, the monetary and cost-push 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.

Evaluation of the Survey of Professional Forecasters in the Greenbook’s Loss Function

We aim to find a forecast in the Survey of Professional Forecasters (SPF) that is closest to the Greenbook forecast of the Federal Reserve Board. To do it, we look for an SPF cross-sectional percentile that is not encompassed by the Greenbook forecast under the Greenbook’s estimated asymmetric quadratic loss function with allowing asymmetry to be time-varying. To evaluate each SPF percentile in terms of the Greenbook’s asymmetric quadratic loss function, we introduce the encompassing test for the asymmetric least square regression (Newey and Powell, Econometrica 55(4):819–847, 1987). From the analysis of the US quarterly real output and inflation forecasts over the past four decades, we find that almost all SPF percentiles are encompassed by the Greenbook forecast in full data period. However there is evidence in sub-periods that many SPF percentiles are not encompassed by Greenbook. Among them, the best SPF percentile that is not encompassed by Greenbook and is closest to Greenbook for real output growth forecast is near the median of the SPF percentiles, while the best SPF percentile for inflation forecast is far below the median in the left tail of the SPF cross-sectional distribution. It indicates that the common practice of using the SPF median can be misleading.

Disagreement between FOMC members and the Fed’s staff: New insights based on a counterfactual interest rate

We examine the degree and sources of disagreement between the members of the Federal Open Market Committee (FOMC) and the Federal Reserve’s (Fed’s) staff about the appropriate policy rate for the period 1994–2012. For that purpose, we compute a recommended interest rate for the Fed’s staff based on its own Greenbook forecasts and a time-varying monetary policy rule à la Taylor (1993), and compare it with the actual target rate. First, we find that there has been internal disagreement between FOMC members and the Fed’s staff about the appropriate policy rate. Second, we reveal that members with an occupational background in finance favor a relatively more hawkish monetary policy. In addition, a preference towards a tighter monetary policy is found under a Democratic President and during Alan Greenspan’s tenure as the Fed’s Chairman. Finally, higher oil prices, a low degree of uncertainty, and episodes of financial stability are also associated with higher interest rates as compared to the Fed staff’s recommendation.

Using a Wage-Price-Setting Model to Forecast U.S. Inflation

Based on the key assumption that firms use a rule of thumb to set prices after settling a wage agreement, this study modifies a wage–price-setting (WPS) model to forecast U.S. inflation over one- to three-year horizons. The out-of-sample forecast results show that productivity growth is a useful predictor of inflation, in the sense that the modified WPS model improves upon some univariate benchmark models during the 1990Q1–2020Q2 period. Since the early 2000s, forecast accuracy can be improved further by combining productivity growth with anchored inflation expectations. Interestingly, during the 2000–2014 period, forecasts derived from the WPS model with constant inflation expectations have been found to slightly outperform Greenbook forecasts in forecasting quarter-over-quarter inflation with horizons up to four-quarter.

Monetary Policy News and Systemic Risk at the Zero Lower Bound

This paper employs a recent contribution to the construction of the shadow nominal interest rate during the zero lower bound episode of the Great Recession of 2008-2009 and the Greenbook forecasts to obtain a measure of monetary policy shocks over that time period. It then identifies monetary policy news shocks as a novel measure of the forward-looking conduct of monetary policy in the U.S. Using the data from 1987-2010 and impulse responses from the method of local projections, it shows that contractionary monetary surprise and news shocks tended to reduce systemic risk measures over the full sample. In contrast, expansionary monetary news shocks reduced systemic risk at the zero lower bound, whereas surprises had little effect. These findings suggest that the Federal Reserve's efforts at providing expansionary forward guidance at the zero lower bound were successful in stabilizing measures of systemic risk during the Great Recession.

Estimating Excess Sensitivity and Habit Persistence in Consumption Using Greenbook Forecast as an Instrument

In this paper, we revisit the issue of excess sensitivity of consumption to income and address the weak instrument problem that is well documented in this literature. Using quarterly data for the U.S. economy, we first highlight the weak instrument problem by showing that the use of conventional instruments tends to overestimate the share of rule-of-thumb consumers. To address this weak instrument problem, we propose a new instrument for endogenous disposable income growth in the consumption function, namely, the Greenbook forecast of real disposable income growth. We show that this instrument encompasses the information contained in the conventional set of instruments, and is a superior predictor of income growth. We find that using our proposed instrument ameliorates the weak instrument problem and provides a much smaller estimate for the rule-of-thumb consumers. We also extend our empirical framework to allow for habit persistence and provide an estimate for this important parameter of the consumption function. Finally, we use a time-varying specification of consumption function that allows for endogenous regressors, and document a decline in the share of rule-of-thumb consumers and a rise in the habit-persistence parameter in the U.S. over our sample period. We find that an increase in credit growth and supplementary income benefits are negatively correlated with share of rule-of-thumb consumers, whereas they are positively correlated with habit persistence parameter.

Predicting Fed Forecasts

Monetary policy decisions by the Fed's Federal Open Market Committee have attracted considerable attention in recent years, especially with quantitative easing through large-scale asset purchases, the introduction of forward guidance, and increases in the federal funds rate. The FOMC's decisions are based in part on the Greenbook forecasts, which are economic forecasts produced by the Federal Reserve Board's staff and which are presented to the FOMC prior to their policy meetings. Drawing on Stekler and Symington's (2016) textual analysis of the minutes of the FOMC meetings, the current paper shows that those minutes provide a proximate mechanism for inferring the Fed staff's Greenbook forecasts of the U.S. real GDP growth rate, years before the Greenbook's public release. The FOMC minutes are thus highly informative about a key input to monetary policymaking.

Has the forecasting performance of the Federal Reserve’s Greenbooks changed over time?

AbstractWe investigate how the forecasting performance of the Federal Reserve Greenbooks has changed relative to commercial forecasters between 1974 and 2009. To this end, we analyze time-variation in the Greenbook coefficients in forecast encompassing regressions. Assuming that model coefficients change continuously, we estimate unobserved components models using Bayesian inference techniques. To verify that our results do not depend on the specific way change is modeled, we also allow the coefficients to change discretely rather than continuously and test for structural breaks using classical inference techniques. We find that the Greenbook forecasts have been consistently superior to the commercial forecasts at all horizons throughout our sample period. Although the forecasting performance gap has narrowed at more distant horizons after the early-to-mid 1980s, it remains significant.