Fiscal Policy: Ex Ante and Ex Post FOMC Greenbooks Other Forecasts - PowerPoint PPT Presentation

Fiscal Policy: Ex Ante and Ex Post Dean Croushore, Simon van Norden Introduction A New Data Set Fiscal Policy: Ex Ante and Ex Post FOMC Greenbooks Other Forecasts Empirical Results Forecast Performance Forecast Bias Forecast Reliability Dean Croushore 1 Simon van Norden 2 Policy Rules Fiscal Policy Taylor Rules 1 University of Richmond Conclusions 2 HEC Montr´ eal & CIRANO AEA 2014

Fiscal Policy: Ex Overview I Ante and Ex Post Dean Croushore, Simon van Norden We construct and analyse a new data set for US Fiscal Introduction Policy A New Data Set ◮ Federal Government FOMC Greenbooks Other Forecasts ◮ Expenditures Empirical Results Forecast Performance ◮ Revenues Forecast Bias ◮ Surplus Forecast Reliability Policy Rules ◮ Structural Surplus Fiscal Policy Taylor Rules ◮ Real-Time Conclusions ◮ 2 vintages per quarter ◮ Several quarters of forecasts and backcasts ◮ Last vintage: end 2006 ◮ Vintages start around 1970s ◮ A real-time perspective over several business cycles. ◮ Consistent estimates of Actual and Structural Surpluses.

Fiscal Policy: Ex Overview II Ante and Ex Post Dean Croushore, Simon van Norden Introduction A New Data Set We draw some lessons from the data FOMC Greenbooks Other Forecasts ◮ Fiscal Forecast Quality Varies Empirical Results ◮ Receipt forecasts biased – over-optimistic Forecast Performance Forecast Bias ◮ Expenditure forecasts more reliable Forecast Reliability Policy Rules ◮ Worse after start of The Great Moderation Fiscal Policy Taylor Rules ◮ Fiscal Policy Intent Conclusions ◮ Fiscal policy seems more counter-cyclical since 1990. ◮ Taylor Rules ◮ The Fed seems to lean against expected fiscal policy.

Fiscal Policy: Ex Outline Ante and Ex Post Dean Croushore, Simon van Norden Introduction Introduction A New Data Set FOMC Greenbooks A New Data Set Other Forecasts FOMC Greenbooks Empirical Results Forecast Performance Other Forecasts Forecast Bias Forecast Reliability Policy Rules Fiscal Policy Empirical Results Taylor Rules Forecast Performance Conclusions Forecast Bias Forecast Reliability Policy Rules Fiscal Policy Taylor Rules Conclusions

Fiscal Policy: Ex FOMC Greenbook Forecasts I Ante and Ex Post Dean Croushore, Simon van Norden Board Staff Projections ◮ FOMC meetings from July 1966 to December 2006 Introduction A New Data Set ◮ Use first & last meeting of each quarter FOMC Greenbooks Other Forecasts Fiscal forecasts for federal government and macroeconomic Empirical Results variables Forecast Performance Forecast Bias Forecast Reliability ◮ Receipts Policy Rules Fiscal Policy ◮ Expenditures Taylor Rules Conclusions ◮ Surplus/Deficit ◮ High-employment budget (HEB) ◮ Current (consumption) and capital account surplus (since 1996) ◮ Unemployment rate ◮ Nominal and Real GDP (GNP before 1992) Fiscal variables converted to nominal GDP Shares

Fiscal Policy: Ex FOMC Greenbook Forecasts II Ante and Ex Post Dean Croushore, Simon van Norden Introduction A New Data Set FOMC Greenbooks Other Forecasts Empirical Results Forecast Performance Forecast Bias Forecast Reliability Policy Rules Fiscal Policy Taylor Rules Conclusions

Fiscal Policy: Ex FOMC Greenbook Forecasts III Ante and Ex Post Dean Croushore, Simon van Norden Introduction A New Data Set Government Surplus (Current Account) FOMC Greenbooks Other Forecasts 0.02 Empirical Results Forecast Performance 0 Forecast Bias Forecast Reliability Policy Rules Output Share -0.02 Fiscal Policy Taylor Rules Conclusions -0.04 -0.06 1970 1975 1980 1985 1990 1995 2000 2005 Darker lines indicate 2nd FOMC Meeting of the Quarter

Fiscal Policy: Ex FOMC Greenbook Forecasts IV Ante and Ex Post Dean Croushore, Simon van Norden 12 Introduction Forecast Availability (Quarters) A New Data Set FOMC Greenbooks 10 Other Forecasts Empirical Results Forecast Performance 8 Forecast Bias C & C surplus Forecast Reliability Expenditure Policy Rules GDP Fiscal Policy 6 HEB Taylor Rules HEB6 Receipts Conclusions RGDP 4 Surplus Unemp. Rate 2 0

Fiscal Policy: Ex FOMC vs Other Fiscal Forecasts Ante and Ex Post Dean Croushore, Few standard data sets of US fiscal forecasts Simon van Norden ◮ CBO forecasts are conditional on current law Introduction ◮ OMB, ERP are viewed as partisan A New Data Set FOMC Greenbooks ◮ Documented forecast bias and inefficiency Other Forecasts Empirical Results e.g. Kleisen-Thornton (2012), Croushore-Hunt (2008), Forecast Performance Forecast Bias Auerbach (1994, 1999), Campbell-Ghysels (1995), Forecast Reliability Policy Rules Plesko (1988); not biased: Belongia (1988) Fiscal Policy Taylor Rules FOMC Greenbook forecasts offer several differences Conclusions ◮ Expected Fiscal Policy ◮ Non-partisan internal forecasts 5-year embargo ◮ Good forecast performance on main macro variables ◮ Long time span (many business cycles) ◮ Forecast and estimated Structural Deficits Major Disadvantage: Short Forecast Horizons

Fiscal Policy: Ex Forecast Bias? Ante and Ex Post We perform standard tests for forecast bias at 0-4Q horizons. Dean Croushore, Simon van Norden Unemployment Introduction ◮ Significant bias at some horizons A New Data Set ◮ Consistent with poor record in 1970s and early 1980s FOMC Greenbooks Other Forecasts Expenditures Empirical Results Forecast Performance ◮ Bias only at horizon 0 Forecast Bias Forecast Reliability Policy Rules Receipts Fiscal Policy Taylor Rules ◮ Significantly over-optimistic on average Conclusions ◮ Particularly in late 1990s and early 2000s. Surplus ◮ No evidence of bias HEB ◮ Significant bias at most horizons ◮ However HEB6 shows no significant bias ◮ HEB6 assumes a constant 6% unemployment rate from 1980 onwards

Fiscal Policy: Ex Forecast Reliability Ante and Ex Post Dean Croushore, Simon van Norden Table: Forecast Error Variance Introduction Horizon Expenditures Receipts Surplus C&C Surplus HEB HEB6 Unemployment A New Data Set 1974Q4-1990Q4 FOMC Greenbooks 0L 0.047 0.075 0.056 0.179 0.141 0.008 Other Forecasts 0F 0.084 0.129 0.127 0.256 0.146 0.042 Empirical Results 1L 0.105 0.189 0.181 0.314 0.152 0.067 Forecast Performance 1F 0.167 0.194 0.256 0.319 0.139 0.122 Forecast Bias 2L 0.149 0.330 0.284 0.413 0.117 0.155 Forecast Reliability 2F 0.212 0.328 0.339 0.406 0.111 0.190 Policy Rules Fiscal Policy 3L 0.197 0.173 0.196 0.383 0.143 0.229 Taylor Rules 3F 0.240 0.214 0.257 0.420 0.144 0.243 Conclusions 4L 0.221 0.207 0.206 0.448 0.093 0.315 4F 0.269 0.250 0.285 0.630 0.137 0.321 1991Q1-2006Q4 0L 0.049 0.129 0.055 0.091 0.210 0.003 0F 0.059 0.141 0.074 0.114 0.243 0.011 1L 0.067 0.179 0.118 0.161 0.329 0.015 1F 0.069 0.228 0.132 0.159 0.314 0.030 2L 0.101 0.403 0.258 0.273 0.464 0.037 2F 0.118 0.421 0.291 0.288 0.451 0.054 3L 0.169 0.609 0.447 0.415 0.591 0.064 3F 0.195 0.630 0.491 0.450 0.586 0.098 4L 0.260 0.832 0.684 0.605 0.769 0.115 4F 0.304 0.844 0.750 0.667 0.786 0.154 Figures are fractions of the variance of the underlying series 1974Q4-2006Q4.

Fiscal Policy: Ex The Fiscal Policy Rule: Ex Post Ante and Ex Post Dean Croushore, Simon van Norden Estimate by OLS Introduction A New Data Set ∆ HEB t = φ 0 + φ HEB · HEB t − 1 + φ U · U t + e t FOMC Greenbooks Other Forecasts Empirical Results Forecast Performance Forecast Bias Sample 1970Q2-2006Q4 1970Q2-1990Q4 1991Q1-2006Q4 Forecast Reliability Policy Rules φ 0 0.004 0.006 0.009 Fiscal Policy Taylor Rules ( 2.124) ( 1.894) ( 2.933) Conclusions φ HEB -0.101 -0.099 -0.250 ( -2.913) ( -2.200) ( -4.471) φ U -0.096 -0.116 -0.262 ( -3.081) ( -2.462) ( -3.780) R 2 0.094 0.101 0.180 φ U /φ HEB 0.951 1.177 1.050 Figures in parentheses are t-ratios based on Newey-West standard errors calculated with 4 lags.

Fiscal Policy: Ex The Fiscal Policy Rule: Ex Ante Ante and Ex Post Dean Croushore, Simon van Norden Now estimate Introduction ∆ HEB t = φ 0 + φ HEB · HEB t − 1 + φ U · U t + ψ U · (ˆ U t | t − 4 − U t ) + ψ HEB · ( ˆ A New Data Set HEB t | t − 4 − HEB t ) + e t FOMC Greenbooks Other Forecasts Sample 1970Q2-2006Q4 1970Q2-1990Q4 1991Q1-2006Q4 Empirical Results φ 0 -0.001 -0.001 0.009 Forecast Performance ( -0.625) ( -0.269) ( 1.792) Forecast Bias Forecast Reliability φ HEB -0.094 -0.054 -0.312 Policy Rules ( -2.747) ( -1.927) ( -3.839) Fiscal Policy Taylor Rules φ U -0.001 0.015 -0.260 Conclusions ( -0.012) ( 0.240) ( -2.582) ψ U 0.153 0.262 -0.241 ( 1.439) ( 1.634) ( -2.101) ψ HEB -0.204 -0.266 -0.219 ( -3.710) ( -2.550) ( -3.827) R 2 0.300 0.356 0.404 Multipliers φ U /φ HEB 0.005 -0.270 0.834 ψ U /φ HEB -1.628 -4.855 0.772 ψ HEB /φ HEB 2.172 4.936 0.704