Has modelsí forecasting performance for US output growth and inflation changed over time, and when?

We evaluate various modelsí relative performance in forecasting future US output growth and inflation on a monthly basis. Our approach takes into account the possibility that the modelsí relative performance can be varying over time. We show that the modelsí relative performance has, in fact, changed dramatically over time, both for revised and real-time data, and investigate possible factors that might explain such changes. In addition, this paper establishes two empirical stylized facts. Namely, most predictors for output growth lost their predictive ability in the mid-1970s, and became essentially useless in the last two decades. When forecasting inflation, instead, fewer predictors are significant (among which, notably, capacity utilization and unemployment), and their predictive ability significantly worsened around the time of the Great Moderation.Output Forecasts, Inflation Forecasts, Model Selection, Structural Change, Forecast Evaluation, Real-time data. Evaluation

Essays on monetary policy in the Euro area

The sequence of the essays in this thesis studies the differentials in inflation and output growth across the Euro Area countries and addresses the role of monetary policy in explaining these differentials. First I study the extent to which inflation and output growth differentials are explained by the propagation of common monetary policy interventions. Next, I evaluate the performance of the monetary authority in fulfilling the stabilization needs of the member countries when it aims to stabilize the aggregate economy. Lastly, I empirically evaluate a policy interest rule to determine the implicit weight the policymaker puts on the country-specific inflation and output growth differentials in addition to the aggregate. The results show that monetary policy interventions do not generate significant differences in the inflation behavior across the countries, while they create significant differences in the output dynamics. Moreover, monetary policy innovations do account for a large portion of country-specific output fluctuations. This is in contrast to the business cycle literature where only a small fraction of output variance is attributed to the monetary policy shocks. In addition, it appears that while targeting the aggregate inflation and output dynamics, monetary authority stabilizes cross-country inflation in the face of idiosyncratic shocks fairly well, though there are considerable differences in the welfare losses associated with the cross-country output variability. Furthermore, country-specific inflation deviations are statistically significant in a Taylor type policy feedback rule, while the aggregate output gap and country-specific output gap differentials appear to be statistically insignificant

The local effects of monetary policy

Previous studies have documented disparities in the regional responses to monetary policy shocks; this variation has been found to depend, in part, on differences in the industrial composition of the regional economies. However, because of computational issues, the literature has often neglected the richest level of disaggregation: the city. In this paper, we estimate the city-level responses to monetary policy shocks in a Bayesian VAR. The Bayesian VAR allows us to model the entire panel of metropolitan areas through the imposition of a shrinkage prior. We then seek the origin of the city-level asymmetric responses.Vector autoregression ; Econometric models

Networking the Yield Curve: Implications for Monetary Policy

PublicFinanceIn this working paper, authors Tatevik Sekhposyan, Tatjana Dahlhaus, and Julia Schaumburg introduce a flexible, time-varying network model to trace the propagation of interest rate surprises across different maturities. First, the authors develop a novel econometric framework that allows for unknown, potentially asymmetric contemporaneous spillovers across panel units, and establish the finite sample properties of the model via simulations. Second, this innovative framework is employed to jointly model the dynamics of interest rate surprises and to assess how various monetary policy actions, for example, short-term, long-term interest rate targeting and forward guidance, propagate across the yield curve. Findings show that the network of interest rate surprises is indeed asymmetric, and defined by spillovers between adjacent maturities. Spillover intensity is high, on average, but shows strong time variation. Forward guidance is an important driver of the spillover intensity. Pass-through from short-term interest rate surprises to longer maturities is muted, yet there are stronger spillovers associated with surprises at medium- and long-term maturities. The authors illustrate how our proposed framework helps our understanding of the ways various dimensions of monetary policy propagate through the yield curve and interact with each other

Has the Information Channel of Monetary Policy Disappeared? Revisiting the Empirical Evidence

PoliticalEconomy|PublicFinanceDoes the Federal Reserve have an “information advantage� in forecasting macroeconomic variables beyond what is known to private sector forecasters? And are market participants reacting only to monetary policy shocks or also to future information on the state of the economy that the Federal Reserve communicates in its announcements via an“information channel?� This paper by PERC Professor Tatevik Sekhposyan, Lucas Hoesch, and Barbara Rossi investigates the evolution of the information channel over time. Although the information channel appears to be important historically, we find no empirical evidenceof its presence in the recent years once instabilities are accounted for

Monetary Policy Uncertainty: A Tale of Two Tails

PublicFinanceDuring the last few decades, central banks across the globe came to recognize the potentially valuable role that transparency can play in stabilizing the economy. For example, the Federal Reserve in the US started releasing a statement describing policy actions regarding the effective policy interest rate. Further, forward guidance, an explicit communication from the Federal Reserve about the likely future course of monetary policy, has been one of the important tools of unconventional monetary policy in the post-financial crisis zero lower bound (ZLB) period of policymaking. It has been established that interest rate predictability has improved with increasing central bank transparency and better communication strategies, as the public could form more accurate expectations about the current and future path of interest rates (as a function of economic conditions). This, in turn, is thought to translate into lower levels of monetary policy uncertainty, which typically has an expansionary effect as it encourages investment and spending. Motivated by the distinct link of interest rate predictability and monetary policy uncertainty, the authors rely on the accuracy of expectations of the policy rate to characterize monetary policy uncertainty. As a basis for their analysis, the authors employ federal funds rate forecast errors for several horizons implied by the Blue Chip Financial Forecasts (BCFF). Results show that positive and negative forecast errors occur in clusters and are tightly linked to the behavior of the policy rate. Namely, negative (positive) forecast errors dominate during the episodes of monetary easing (tightening). Moreover, the conditional (historical) forecast error distributions become tighter over time indicating that the forecast error dispersions decreased over time. Strikingly, this decline is nearly entirely driven by the fact that the right tail (associated with positive forecast errors and tightening episodes) shortens over time, while the left tail (associated with negative forecast errors and easing episodes) shows no apparent downward trend and exhibits mainly cyclical variations. We attribute this behavior to increasingly better-communicated policy actions from the Federal Reserve during monetary tightenings. To measure monetary policy uncertainty, the authors summarize the asymmetry in the forecast error evolution using a metric that quantifies uncertainty in terms of probabilities and, therefore, allows the authors to take the asymmetric tail behavior into account. This metric of monetary policy uncertainty combines both left- and right-tail behaviors of forecast errors to a single joint measure. This simplifies the analysis of the economic effects of monetary policy uncertainty. Since the uncertainty measure is based on the forecast errors, it inherits all the documented asymmetries and time-varying properties associated with the forecast errors. Lastly, this paper investigates whether there is non-linear propagation of monetary policy uncertainty shocks and whether it matters for macroeconomic dynamics. The authors find recessionary effects that are stronger in easing relative to tightening. After purging our measure for macroeconomic uncertainty, effects generally get dampened, but non-linearities remain

Monetary Policy Uncertainty: A Tale of Two Tails

HealthCare|PublicFinanceOver the past two decades, expectations about the future of monetary policy has become a useful agent used by households and firms as they make spending and investment decisions. As central banks worldwide recognize the role of these expectations, there has been a push to set specific macroeconomic targets and transparently communicate future actions to achieve those targets. In PERC working paper 1808, PERC Fellow Tatevik Sekhposyan and coauthor Tatjana Dahlhaus study the link between monetary policy uncertainty and interest rate predictability, as well as the effects of the uncertainty on the larger economy

Can Electricity Demand Help Us Monitor the Economy?

EducationThe recent pandemic has emphasized the importance of high-frequency economic variables. Electricity consumption, particularly important as a production input, is one such variable. However, electricity consumption typically exhibits marked seasonal fluctuations, which mask the fluctuations that are interesting from a business cycle perspective. In policy study 2202, PERC Professor Tatevik Sekhposyan and coauthor Noah Kouchekinia show that after capturing the seasonal effects associated with weather and calendar events, electricity consumption can provide a rapid reflection of the state of the economy. This may be particularly valuable for measuring regional economic activity, where official statistics are slower to arrive