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SUMMARYWe study the role of consumer confidence in forecasting real personal consumption expenditure, and contribute to the extant literature in three substantive ways. First, we re-examine existing empirical models of consumption and consumer confidence, not only at the quarterly frequency, but using monthly data as well. Second, we employ real-time data in addition to commonly used revised vintages. Third, we investigate the role of consumer confidence in a rich information context. We produce forecasts of consumption expenditures with and without consumer confidence measures using a dynamic factor model and a large, real-time, jagged-edge dataset. In a robust way, we establish the important role of confidence surveys in improving the accuracy of consumption forecasts, manifesting primarily through the services component. During the recession of 2007-2009, sentiment is found to have a more pervasive effect on all components of aggregate consumption: durables, non-durables and services.

While the yield spread has long been recognized as a good predictor of recessions, it seems to have been largely overlooked by professional forecasters. We examine this puzzle, established by Rudebusch and Williams (2009), in a data-rich environment including not just the yield spread but many other predictors as well. We confirm the puzzle in this context by examining the contributions of both the SPF forecasts and the yield spread in predicting recessions, and by examining the information content of SPF forecasts directly. Furthermore, we take the first step towards a possible resolution of this puzzle by recognizing the heterogeneity across professional forecasters. JEL Classification: C53, E43, E47

I estimate a forward‐looking, dynamic, discrete‐choice monetary policy reaction function for the U.S. economy that accounts for the fact that there are substantial restrictions in the period‐to‐period changes of the policy instrument. I find a substantial contrast between the periods before and after Paul Volcker's appointment as Fed chairman in 1979, both in terms of the Fed's response to expected inflation and in terms of its response to the (perceived) output gap. In the pre‐Volcker era, the Fed's response to inflation was substantially weaker than in the Volcker–Greenspan era; conversely, the Fed seems to have been more responsive to (inaccurate real‐time estimates of) the output gap in the pre‐Volcker era than later. These results, which carry through a series of extensions and robustness checks, provide support for the “policy mistakes” hypothesis as an explanation of the stark contrast in U.S. macroeconomic performance between the pre‐Volcker and the Volcker–Greenspan periods.