How well does the Beige Book reflect economic activity? Evaluating qualitative information quantitatively

Eight times a year, approximately two weeks before every FOMC meeting, the Federal Reserve releases a description of economic conditions in the twelve Federal Reserve districts. Called the Beige Book, this description relies primarily on surveys and anecdotal evidence gathered by the twelve district banks. In this paper, we read and numerically scored past Beige Books in order to determine the extent to which the descriptions in these books accurately reflect current economic activity as measured by quarterly real GDP growth. We find that both in-sample and out-sample, the quantitative Beige Book indices do have significant predictive content for current and next quarter real GDP growth. Furthermore, the Beige Book has information about current quarter real GDP growth not present in other indicators such as the Blue Chip Consensus Forecast or time series models that use real-time data.Economic policy ; Federal Open Market Committee ; Monetary policy

Evaluating the Eleventh District's Beige Book

In this study, Nathan Balke and Mine Yucel ask whether the Eleventh Federal Reserve District's Beige Book description contains timely information about economic activity within the District. They examine whether the Beige Book description tracks current Texas real gross state product (GSP) growth and current Texas employment growth. They also study whether the Beige Book has information about growth not present in other regional indicators that would have been available to analysts at the time of the Beige Book's release. They find that both the Beige Book summary and the average across sectors reflect Texas GSP and employment growth very well. These two measures of the Beige Book also have predictive content for one quarter ahead GSP growth. Balke and Yucel also find that the Eleventh District's Beige Book has information content for Texas economic activity over and above other state economic indicators such as Texas employment growth, personal income, or sectoral employment growth. Because the Beige Book is released at least one month earlier than employment data and at least two years before GSP data, its timeliness makes it a good tool for current regional economic analysis.Employment (Economic theory) ; Unemployment ; Economic indicators

The algebra of price stability

Prices

The dynamics of recoveries

Business cycles ; Inventories

The Estimation of Prewar GNP: Methodology and New Evidence

The paper develops new methodology for the estimation of prewar GNP, taps previously unused data sources, and develops new estimates for the periods 1869-08 and 1869-28. Primary among the new data sources are direct measures of output in the transportation, communications, and construction sectors, and estimates of the consumer price index. New measures of real GNP, nominal GNP, and the GNP deflator are developed. The new estimates of real GNP are as volatile on average over the business cycle as the traditional Kuznets-Kendrick aeries but dampen the amplitude of some cycles while raising the amplitude of others. The new estimates of the GNP deflator are distinctly less volatile than the traditional series and in fact no more volatile than in the postwar period.

Credit and economic activity: shocks or propagation mechanism?

Credit

The Estimation of Prewar GNP Volatility, 1869-1938

New evidence is provided to assess the recent controversy regarding the volatility of real economic activity before 1929 relative to the period since World War II. Some recent work claims that the longstanding stylized fact of greater prewar volatility is "spurious". In contrast, this paper reconfirms the greater amplitude of business fluctuations prior to the Great Depression. The basic technique is the regression method, which estimates equations for real GNP during 1909-38, with one or more explanatory variables for components of GNP, and then uses the estimated coefficients to "backcast" real GNP or the period 1869-1908. The paper contains an extensive examination of the sensitivity of these regression indexes to alternative dependent variables, sample periods, detrending methods, and the inclusion of alternative explanatory variables. Particular attention is paid to the conflicting evidence regarding the amplitude of cycles in construction activity between 1870 and 1890. The resulting prewar/postwar volatility ratios, for 1869-1928 as compared to 1950-1980, range from 1.43 to 2.16. The paper concludes by suggesting that this range of volatility ratios is more likely to understate than overstate the prewar/postwar volatility ratio.

The federal funds rate as an indicator of monetary policy: evidence from the 1980s

Recently, several economists have argued that movements in the federal funds rate are a good proxy for changes in monetary policy. In this article, Nathan Balke and Kenneth Emery critically examine this view and the evidence supporting it. Using simple vector autoregressions, they find that before 1980 the correlations between the federal funds rate and other important macroeconomic variables are consistent with a traditional monetary policy interpretation of the federal funds rate. However, they show that after 1982 the relationships between the federal funds rate and other macroeconomic variables change significantly. Most important, the correlations between the federal funds rate and other macroeconomic variables observed during the 1980s are not as consistent with a traditional monetary policy view of the federal funds rate as they were before 1980. ; Balke and Emery's work highlights how relationships between important macroeconomic variables can change when institutions or policy regimes change. While the federal funds rate may still be a good indicator of monetary policy, its relationship with other important macroeconomic variables is now clearly different from what it was before 1980.Interest rates ; Economic indicators

Low frequency movements in stock prices: a state space decomposition

Previous analyses have concluded that expectations of future excess stock returns rather than future real dividend growth or real interest rates are responsible for most of the volatility in stock prices. In this paper, we employ a state-space model to model the dynamics of the log price-dividend ratio along with long-term and short term interest rates, real dividend growth, and inflation. The advantage of the state space approach is that we can parsimoniously model the low frequency movements present in the data. We find that if one allows permanent changes, even though very small, in real dividend growth, real interest rates, inflation but not excess stock returns then expectations of real dividend growth and real interest rates become significant contributors to fluctuations in stock prices. However, we also show that stock price decompositions are very sensitive to assumptions about which unobserved market fundamentals have a permanent component. When we allow excess stock returns to have a permanent component but not real dividend growth, then excess stock returns becomes an important contributor to stock price movements while real dividend growth is not. Unfortunately, the data is not particularly informative about which of these alternative models is more likely.Dividends ; Stock market ; Stocks ; Inflation (Finance)

Large shocks, small shocks, and economic fluctuations: outliers in macroeconomic times series

Macroeconomics ; Time-series analysis