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I am grateful to Laurence Ball for his helpful comments and assistance and Dean Croushore for providing the Greenbook data. I would also like to thank Athansios Orphanides, Rodolfo Maino, Pau Rabanal, and participants of the EEA 2002 and AEA 2003 meetings for their suggestions. This paper has benefited enormously from conversations with economists at the St. Louis Federal Reserve Bank and Board of Governors. A special thank you goes to Erik Freas and Ann Robertson for editing help. All remaining errors are naturally mine.
Greenbook forecasts are produced before each meeting of the Federal Open Market Committee by the Research staff at the Board of Governors. See page 10.
Until 1993, GNP rather than GDP was used as a main indicator of national output. This switch is not expected to have any major impact on the results.
I start my sample in 1987:Q3 as it is the first quarter of Alan Greenspan’s chairmanship of the Federal Reserve Board. I end my sample in 1994 because Greenbook forecasts for later observations were not available to me (see further).
The differences among estimates are also caused by the revisions. As mentioned earlier, the lags-and-leads specification uses revised data, while the other two use unrevised data. Tchaidze (2001) shows that accounting for revisions for this particular subsample is an important factor.
All the estimations in this paper are performed with an OLS/Newey-West (Newey and West, 1987) procedure, thus accounting standard errors for possible heteroscedasticity and autocorrelation.
The rule suggested by Taylor (1993) originally had an inflation coefficient of 1.5, an output gap coefficient of 0.5, and a constant term of 1. Several studies have suggested, however, a stronger response to output gap (Ball, 1999; Williams, 1999).
Standard errors in the forward-looking specification are calculated according to the methodology described in Pagan (1984) in order to account for a generated regressor Etεqt+3.
Average inflation and real interest rate are calculated using revised data.
Solely for the purpose of brevity, I “identify” the monetary policy of the Federal Reserve with the chairman of its Board. The proper title for this section would have been “How tough was the Federal Reserve during the chairmanship of Paul Volcker?”
See previous footnote.