Fed Governor Kohn: How The Fed Forecasts Inflation and Sources of Policy Errors Economist's View
リンク: Economist's View.
Fed Governor Kohn: How The Fed Forecasts Inflation and Sources of Policy Errors
Here are some remarks on the nuts and bolts of how the Fed forecasts inflation by Governor Donald L. Kohn. Points to note are (1) The Fed uses a variety of models to forecast inflation including models with naïve adaptive expectations to models with rational expectations and wage and price frictions. The forecasts from these models are examined in their totality and then “judgmentally adjusted” to arrive at a forecast for inflation. Surveys of economists and the public are also used to gain information about inflationary expectations. (2) The evidence suggests the forecasts used by the FOMC have been biased upward by .2% and have a variance that results in a .5% positive or negative error about one third of the time. (3) The reason for the bias may be due to an undetected fall in the natural rate of unemployment which in turn caused an upward bias in the inflation forecasts. (4) The remarks highlight the difficulty in estimating the natural rate of unemployment contemporaneously and how that difficulty has led to policy errors in the past. (5) A conclusion is that monetary policy could be improved through two advances, better means of estimating inflationary expectations and better means of estimating the natural rate of unemployment. Given the policy errors made in the past due to misperceptions concerning the natural rate of unemployment, I see it this as an area of particular concern. That concern is heightened by the large demographic changes likely to affect labor markets and the economy in the years ahead. Here’s a link to the remarks with graphs showing inflation forecast errors by the Fed from 1984-2000:
