No abstract

Recent research has documented that the Federal Reserve produces systematic errors in forecasting inflation, real GDP growth, and the unemployment rate, even though these forecasts are unbiased. We show that these systematic errors reveal that the Fed is "surprised" by real and inflationary cycles. Using a modified Mincer-Zarnowitz regression, we show that the Fed knows the state of the economy for the current quarter, but cannot predict it one quarter ahead. We further show that even allowing for an asymmetric loss function the Fed does not appear to know the state of the economy one quarter ahead.

Many studies have undertaken separate analyses of the Fed's forecasts of real GDP growth and inflation. This paper presents a method for jointly evaluating the direction of change predictions of these variables. We conclude that that some of the inflation forecasts, examined separately, were not valuable. However, the joint pattern of GDP and inflation projections was generally in accord with the economy's movements.

This paper estimates the permanent and transitory movements in U.S. output and the unemployment rate and the relationships between them. The results suggest that permanent movements in U.S. output and the unemployment rate are important for explaining overall fluctuations. Further, the correlation between changes in these series arises in large part due to the relationship between their permanent components. Copyright (c) 2009 The Ohio State University.

Okun's law is an empirical relationship that measures the correlation between the deviation of the unemployment rate from its natural rate and the deviation of output growth from its potential. This relationship is often referred to by policy makers and used by forecasters. In this paper, we estimate Okun's coefficients separately for each U.S. state using an unobserved components framework and find variation of the coefficients across states. We exploit this heterogeneity of Okun's coefficients to directly examine the potential factors that shape Okun's law, and find that indicators of more flexible labor markets (higher levels of education achievement in the population, lower rate of unionization, and a higher share of non-manufacturing employment) are important determinants of the differences in Okun's coefficient across states.