Has the Economy Become More Predictable? Changes in Greenbook Forecast Accuracy

Peter Tulip

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Monetary Policy and Economic Impact Forecasting Techniques and Applications Market Dynamics and Volatility

Abstract

Several researchers have recently documented large reductions in economic volatility. But a more important question may be whether the economy has become more predictable. Using forecasts from the Federal Reserve Greenbooks, I find that inflation and output have become more predictable, though the results for output are somewhat mixed. The reductions in unpredictability (if any) are significantly smaller than reductions in volatility. Associated with this, the predictable component of fluctuations in output and inflation has virtually disappeared.

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1991Heteroskedasticity and Autocorrelation Consistent Covariance Matrix Estimation 1994Automatic Lag Selection in Covariance Matrix Estimation n.d.Output Fluctuations in the United States: What Has Changed since the Early 1980's?2007Why Has U.S. Inflation Become Harder to Forecast?1999Has the U.S. Economy Become More Stable? A Bayesian Approach Based on a Markov-Switching Model of the Business Cycle 2000Federal Reserve Information and the Behavior of Interest Rates 2001The Long and Large Decline in U.S. Output Volatility 2001Are Phillips Curves Useful for Forecasting Inflation?

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