Rachel J. Mandal

William T. Gavin

English

Research Papers in Economics

NationalEconomicTrends
July 2001
Economic News and
Monetary Policy
The measurement process for economic data contin-
ues for years after the initial data release.  For example,
the April advance report on gross domestic product
(GDP) in the first quarter of 2001 estimated that real
GDP grew at a 2 percent annual rate.  A month later,
the preliminary estimate revised GDP growth down to
1.3 percent.  The final estimate released on June 29
was 1.2 percent.  But this figure is not truly final, as
periodic methodological changes will likely lead to
revisions of these numbers years from now.  (The lat-
est comprehensive revisions to GDP were discussed 
in the November 1999 issue of National Economic
Trends.)  In theory, we are supposed to get better esti-
mates with each revision.
While these revisions might improve the accuracy
of the data, revised data may not be appropriate for
evaluating past forecasts or policy decisions.  To eval-
uate past forecasts, we use the data that were first
released because that is what forecasters were trying to
predict.  We also use real-time data to study the reaction
of monetary policymakers to incoming economic news.
To make real-time data readily available, Croushore
and Stark (2000) of the Federal Reserve Bank of
Philadelphia have created a data set of major macro-
economic time series available at given points in time.
Real-time monthly and quarterly data from November
1965 to the present are available.
1 These data are like
photographs—capturing a single moment in time.
Monthly figures are the data that were available to the
public as of the fifteenth day of that month.  Quarterly
figures are the data that were available on the fifteenth
day of the month in the middle of that quarter.  
The accompanying chart illustrates the fit of real-
time data in a version of the Taylor rule—a simple
characterization of monetary policy that describes policy
decisions concerning interest rates surprisingly well.
It is expressed as:
Federal Funds Rate = 1 + 1.5 x Inflation Rate + 0.5 x
Output Gap.
If the equilibrium real interest rate (the long-run aver-
age difference between the funds rate and the inflation
rate) is assumed to be 2 percent, then this version of the
Taylor rule implies a long-run inflation rate of 2 percent.
(In the long run, the output gap—the difference between
actual and potential GDP—will be zero.)  The chart
shows that the Taylor rule provides a much better reflec-
tion of the actual movements in the federal funds rate
when real-time inflation and output data enter the rule.
It is interesting to note that the real-time Taylor rule rate
generally lies above the actual federal funds rate—which
makes sense given that the average inflation rate exceed-
ed 2 percent between 1983 and 2000, regardless of
whether one uses the real-time (2.8 percent) or current-
vintage data (2.6 percent) to calculate the GDP deflator.
In contrast, because the current-vintage Taylor rule rate
generally lies below the actual federal funds rate, this
rate mistakenly implies that actual policy was tighter
than necessary to achieve an average inflation rate of 
2 percent during this period.  In this case, the real-time
data lead to more sensible conclusions about monetary
policy responses to the perceived state of the economy.
—William T. Gavin and Rachel J. Mandal
1 Croushore, Dean and Tom Stark, “A Real-Time Data Set for Macroecono-
mists: Does Data Vintage Matter for Forecasting,” Working Paper 00-6,
Federal Reserve Bank of Philadelphia, 2000. 
www.phil.frb.org/econ/forecast/reaindex.html.
Views expressed do not necessarily reflect official positions of the Federal Reserve System
Taylor Rule:  Current Versus Real-Time Data
12
10
8
6
4
2
0
Feb 83 Feb 85 Feb 87 Feb 89 Feb 91 Feb 93 Feb 95 Feb 97 Feb 99
P
e
r
c
e
n
t
 
A
n
n
u
a
l
 
R
a
t
e
Taylor Rule with Current Vintage Data
Taylor Rule with Real-Time Data
Actual Federal Funds Rate

Economic news and monetary policy

http://research.stlouisfed.org/publications/net/20010701/cover.pdf

Economic news and monetary policy

Abstract

Similar works

Full text

Available Versions

Research Papers in Economics