The use and abuse of real time and anecdotal information in monetary policymaking
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The Use and Abuse of Real-Time and Anecdotal Information in Monetary Policymaking. Evan F. Koenig Senior Economist and Vice President Federal Reserve Bank of Dallas Dallas, Texas USA. Main points Data revisions complicate policy Usually, revisions are not given proper treatment

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The Use and Abuse of Real-Time and Anecdotal Information in Monetary Policymaking

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The use and abuse of real time and anecdotal information in monetary policymaking

The Use and Abuse of Real-Time andAnecdotal Information in Monetary Policymaking

Evan F. Koenig

Senior Economist and Vice President

Federal Reserve Bank of Dallas

Dallas, Texas

USA


The use and abuse of real time and anecdotal information in monetary policymaking

Main points

  • Data revisions complicate policy

  • Usually, revisions are not given proper treatment

  • Anecdotal/qualitative information potentially valuable


The use and abuse of real time and anecdotal information in monetary policymaking

Example of the revisions problem:

U.S. monetary policy in the 1990s


Professional forecasters over predicted inflation during most of the 1990s

Professional forecasters over-predicted inflationduring most of the 1990s


The use and abuse of real time and anecdotal information in monetary policymaking

A candidate explanation: profitability

  • profitability = (labor productivity)/(real wage)

    = price/(labor cost per unit output)

  • high profitability ⇒

    • expand output and employment

    • raise wages or cut prices

  • 1970s: productivity deceleration + sluggish real wage ⇒ low profitability

  • 1990s: productivity acceleration + sluggish real wage ⇒ high profitability


Profitability movements explain much of the nairu s variation

Profitability movements explain muchof the NAIRU’s variation


Profitability apparently a powerful long leading unemployment indicator

Profitability apparently a powerful long-leadingunemployment indicator


Profitability estimates are subject to large revisions

Profitability estimates are subject to large revisions


Inflation pressures revised vs real time

Inflation pressures: revised vs. real time


The use and abuse of real time and anecdotal information in monetary policymaking

Apples and oranges

  • Data relevant for policy are 1st release or lightly revised (oranges)

  • Forecasting models usually estimated using heavily revised data (apples)


The use and abuse of real time and anecdotal information in monetary policymaking

Correct procedure: estimate using “real-

time-vintage” data

  • “Real-time vintage” = at each point in sample, the 1st release and lightly revised data then available

  • Requires short data series of many vintages


The use and abuse of real time and anecdotal information in monetary policymaking

Alternatives to conventional statistics: anecdotal & qualitative data

“Who are you going to believe? Me or your lying eyes?”

–Groucho Marx


The use and abuse of real time and anecdotal information in monetary policymaking

The Federal Reserve collects anecdotal

information:

  • Through Directors of 12 regional Reserve Banks and their 25 Branches

  • Through calls to business contacts prior to each FOMC meeting

    • Each Reserve Bank prepares a call summary

    • Summaries are assembled and released as the “Beige Book”


The use and abuse of real time and anecdotal information in monetary policymaking

How useful is the Beige Book?

  • Receives substantial press attention

  • Has predictive power for output and employment


The collapse of high tech industrial production

The collapse of high-tech industrial production


The collapse of high tech industrial production1

The collapse of high-tech industrial production


The use and abuse of real time and anecdotal information in monetary policymaking

“Sales growth weakened sharply for producers of high-tech equipment.”

“Businesses have begun to curtail technology-related investment.”

“Consumer demand for PCs has been weakening since the Fall of 2000.”

–FRB-Dallas Beige Book report, January 2001


The use and abuse of real time and anecdotal information in monetary policymaking

ISM Report on Business

  • Survey of 400 manufacturing firms, nationwide

  • Orders, output, jobs, etc.: expanding, contracting, or unchanged?

  • Numerical index = % expanding + 0.5 × (% unchanged)

  • PMI = weighted average of component numerical scores


Goldman sachs study shows pmi a big market mover

Goldman-Sachs study shows PMI a big market mover


The use and abuse of real time and anecdotal information in monetary policymaking

Limitations of PMI/Beige Book

  • Sampling not scientific (small, unrepresentative)

  • Responses not properly weighted

  • Beige Book difficult to interpret


The use and abuse of real time and anecdotal information in monetary policymaking

Advantages of PMI/Beige Book

  • Timely

  • Little if any revision

  • Respondents filter out short-term fluctuations


The pmi captures trends in factory output growth

The PMI captures trends in factory output growth


The pmi captures trends in factory output growth1

The PMI captures trends in factory output growth


The use and abuse of real time and anecdotal information in monetary policymaking

Summary and Conclusions

  • Don’t trust charts/forecasts that mix apples (heavily revised data) and oranges (lightly revised data)

  • Archive statistical releases!

  • Anecdotal/qualitative information potentially quite helpful


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