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

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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  1. 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

  2. Main points • Data revisions complicate policy • Usually, revisions are not given proper treatment • Anecdotal/qualitative information potentially valuable

  3. Example of the revisions problem: U.S. monetary policy in the 1990s

  4. Professional forecasters over-predicted inflationduring most of the 1990s

  5. 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

  6. Profitability movements explain muchof the NAIRU’s variation

  7. Profitability apparently a powerful long-leadingunemployment indicator

  8. Profitability estimates are subject to large revisions

  9. Inflation pressures: revised vs. real time

  10. Apples and oranges • Data relevant for policy are 1st release or lightly revised (oranges) • Forecasting models usually estimated using heavily revised data (apples)

  11. 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

  12. Alternatives to conventional statistics: anecdotal & qualitative data “Who are you going to believe? Me or your lying eyes?” –Groucho Marx

  13. 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”

  14. How useful is the Beige Book? • Receives substantial press attention • Has predictive power for output and employment

  15. The collapse of high-tech industrial production

  16. The collapse of high-tech industrial production

  17. “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

  18. 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

  19. Goldman-Sachs study shows PMI a big market mover

  20. Limitations of PMI/Beige Book • Sampling not scientific (small, unrepresentative) • Responses not properly weighted • Beige Book difficult to interpret

  21. Advantages of PMI/Beige Book • Timely • Little if any revision • Respondents filter out short-term fluctuations

  22. The PMI captures trends in factory output growth

  23. The PMI captures trends in factory output growth

  24. 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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