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1 Dean Croushore University of Richmond 2 HEC Montréal & CIRANO SEM U. Chicago
2 Overview I We construct and analyse a new data set for US Fiscal Policy s Federal Government Expenditures Revenues Surplus Structural Surplus (HEB) Real-Time 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.
3 Overview II In this paper, we focus on the performance of these forecasts. How large is the forecast uncertainty? How do Greenbook forecasts compare to other forecasts? Are the Greenbook forecasts biased? Are the Greenbook forecasts efficient? Outline
4 FOMC Greenbook s I Board Staff Projections FOMC meetings from July 1966 to December 2006 Use first & last meeting of each quarter Fiscal forecasts for federal government and macroeconomic variables Receipts Expenditures 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
5 FOMC Greenbook s II
6 FOMC Greenbook s III Output Share Government Surplus (Current Account) Darker lines indicate 2nd FOMC Meeting of the Quarter
7 FOMC Greenbook s IV Availability (Quarters) C & C surplus Expenditure GDP HEB HEB6 Receipts RGDP Surplus Unemp. Rate 2 0
8 FOMC vs Other Fiscal s Few standard data sets of US fiscal forecasts CBO forecasts are conditional on current law OMB, ERP are viewed as partisan Documented forecast bias and inefficiency e.g. Kleisen-Thornton (2012), Croushore-Hunt (2008), Auerbach (1994, 1999), Campbell-Ghysels (1995), Plesko (1988); not biased: Belongia (1988) FOMC Greenbook forecasts offer several differences Expected Fiscal Policy Non-partisan internal forecasts 5-year embargo Good forecast performance on main macro variables Long time span (many business cycles) and estimated Structural Deficits Major Disadvantage: Short Horizons
9 Table: Error Variance Horizon Expenditures Receipts Surplus C&C Surplus HEB HEB6 Unemployment 1974Q4-1990Q4 0L F L F L F L F L F Q1-2006Q4 0L F L F L F L F L F Figures are fractions of the variance of the underlying series 1974Q4-2006Q4.
10 : Greenbook vs. CBO We ve tried to make this comparison less unfair. Very different conditioning assumptions. Use first quarter FOMC meeting closest to CBO forecast. Annual forecasts from 1982 (1989 for 1 Year Receipts Expenditures.) Variable SURPLUS RECEIPTS EXPENDITURES Horizon (Years) RMSE Greenbook RMSE CBO H0: Equal Quadratic Loss H0: Equal Absolute Loss H0: GB encompasses CBO H0: CBO encompasses GB
11 Bias? Means and Outcome Measures Table 1 Summary Results of Bias Tests Surplus Expenditures Receipts Horizon Concept First Last First Last First Last 0 Last < 0.01 Initial < 0.01 < One Year < 0.01 < 0.01 < 0.01 < 0.01 Prebenchmark < Last Initial One Year Prebenchmark Last Initial One Year < 0.01 < 0.01 Prebenchmark HEB HEB6 Unemployment Horizon Concept First Last First Last First Last 0 Last < 0.01 < < Initial < One Year < Last < Initial One Year Last < 0.01 < Initial One Year Note: The figures shown are p-values for tests of the null hypothesis that the mean forecast error is zero. The sample period is 1974:Q4 to 2006:Q4, except for HEB6, for which the sample begins in 1981:Q1.
12 Bias? Medians and Outcome Measures Sign Test Horizon Concept Surplus Expenditures Receipts HEB HEB6 Unemployment First Last First Last First Last First Last First Last First Last 0 Last 60% 72% 3% 11% 11% 1% 5% 0% 11% 22% 0% 0% Initial 72% 86% 0% 0% 100% 11% 0% 22% 1 Year 60% 86% 0% 0% 5% 0% 0% 16% PreBenchmark 5% 22% 0% 1% 29% 0% 2 Last 15% 53% 37% 53% 70% 53% 8% 2% 24% 2% 0% 0% Initial 15% 15% 70% 37% 37% 53% 0% 0% 1 Year 2% 37% 24% 53% 96% 70% 0% 0% PreBenchmark 4% 2% 53% 70% 53% 24% 4 Last 11% 48% 0% 0% 11% 25% 92% 73% 48% 48% 1% 0% Initial 11% 25% 0% 0% 4% 11% 4% 1% 1 Year 11% 4% 0% 0% 48% 25% 4% 1% PreBenchmark 25% 11% 0% 0% 11% 25% Wilcoxon Signed-Rank Test Signed Rank Test Horizon Concept Surplus Expenditures Receipts HEB HEB6 Unemployment First Last First Last First Last First Last First Last First Last 0 Last 70% 15% 1% 4% 3% 1% 1% 0% 0% 1% 0% 0% Initial 34% 79% 0% 1% 18% 7% 0% 22% 1 Year 60% 84% 0% 0% 1% 0% 0% 23% PreBenchmark 12% 23% 0% 1% 17% 4% 2 Last 10% 9% 23% 30% 59% 56% 44% 47% 1% 0% 1% 1% Initial 2% 1% 22% 31% 27% 24% 2% 1% 1 Year 2% 3% 59% 67% 83% 77% 2% 1% PreBenchmark 2% 1% 38% 49% 37% 24% 4 Last 9% 14% 0% 0% 0% 1% 68% 96% 1% 1% 13% 3% Initial 7% 9% 0% 0% 0% 1% 11% 3% 1 Year 8% 9% 0% 0% 1% 2% 11% 3% PreBenchmark 6% 5% 0% 0% 0% 1%
13 Bias? Medians and More Horizons I Full Sample p Values for Median FE = 0 First Half Second Half Concept Horizon Meeting Sign Signed Rank Sign Signed Rank Sign Signed Rank RECEIPTS 0 L 0% 4% 2% 2% 6% 67% RECEIPTS 0 F 29% 17% 32% 24% 53% 42% RECEIPTS 1 L 79% 50% 26% 97% 45% 26% RECEIPTS 1 F 79% 32% 17% 84% 31% 17% RECEIPTS 2 L 24% 24% 92% 45% 14% 20% RECEIPTS 2 F 53% 37% 92% 48% 48% 41% RECEIPTS 3 L 13% 18% 60% 35% 12% 33% RECEIPTS 3 F 83% 14% 88% 19% 31% 40% RECEIPTS 4 L 25% 1% 3% 1% 40% 61% RECEIPTS 4 F 11% 0% 3% 0% 76% 65% EXPEND 0 L 1% 1% 0% 0% 53% 88% EXPEND 0 F 0% 0% 0% 0% 10% 34% EXPEND 1 L 18% 29% 26% 11% 45% 81% EXPEND 1 F 9% 26% 38% 22% 13% 87% EXPEND 2 L 70% 49% 48% 60% 100% 46% EXPEND 2 F 53% 38% 48% 78% 92% 35% EXPEND 3 L 95% 35% 88% 100% 88% 40% EXPEND 3 F 83% 31% 99% 91% 88% 33% EXPEND 4 L 0% 0% 0% 0% 76% 34% EXPEND 4 F 0% 0% 0% 0% 76% 45% Using last Pre-Benchmark-Revision estimate. Full Sample is 1974Q4-2006Q4. Split sample is pre-1991 and post-1990
14 Bias? Medians and More Horizons II Full Sample p Values for Median FE = 0 First Half Second Half Concept Horizon Meeting Sign Signed Rank Sign Signed Rank Sign Signed Rank SURPLUS 0 L 22% 23% 8% 9% 90% 96% SURPLUS 0 F 5% 12% 5% 4% 53% 97% SURPLUS 1 L 2% 1% 3% 3% 31% 18% SURPLUS 1 F 3% 1% 17% 3% 13% 14% SURPLUS 2 L 2% 1% 6% 2% 14% 24% SURPLUS 2 F 4% 2% 6% 2% 28% 42% SURPLUS 3 L 24% 2% 31% 5% 60% 40% SURPLUS 3 F 6% 5% 4% 5% 60% 31% SURPLUS 4 L 11% 5% 40% 10% 13% 31% SURPLUS 4 F 25% 6% 40% 13% 13% 31% UNEMP 0 L 16% 23% 14% 12% 53% 95% UNEMP 0 F 0% 0% 1% 2% 0% 0% UNEMP 1 L 0% 0% 6% 3% 0% 0% UNEMP 1 F 0% 0% 2% 4% 0% 0% UNEMP 2 L 0% 1% 1% 6% 1% 3% UNEMP 2 F 0% 2% 2% 13% 0% 4% UNEMP 3 L 0% 2% 4% 16% 1% 7% UNEMP 3 F 0% 6% 4% 8% 4% 8% UNEMP 4 L 1% 3% 3% 8% 3% 21% UNEMP 4 F 4% 11% 13% 38% 3% 22% Surplus: Pre-Benchmark-Revision Estimate Unemployment Rate: Current Vintage Full Sample is 1974Q4-2006Q4. Split sample is pre-1991 and post-1990
15 Bias? Medians and More Horizons III Full Sample p Values for Median FE = 0 First Half Second Half Concept Horizon Meeting Sign Signed Rank Sign Signed Rank Sign Signed Rank HEB6 0 L 22% 1% 8% 0% 90% 95% HEB6 0 F 11% 0% 8% 0% 71% 91% HEB6 1 L 2% 0% 3% 0% 21% 12% HEB6 1 F 18% 0% 53% 0% 31% 21% HEB6 2 L 2% 0% 2% 0% 72% 29% HEB6 2 F 24% 1% 72% 2% 48% 36% HEB6 3 L 42% 2% 60% 5% 60% 47% HEB6 3 F 42% 3% 60% 4% 88% 63% HEB6 4 L 48% 1% 13% 1% 76% 41% HEB6 4 F 48% 1% 13% 1% 76% 49% HEB 0 L 0% 0% 0% 0% 90% 95% HEB 0 F 5% 1% 0% 0% 71% 91% HEB 1 L 13% 18% 0% 0% 21% 12% HEB 1 F 4% 9% 0% 0% 31% 21% HEB 2 L 2% 47% 0% 2% 72% 29% HEB 2 F 8% 44% 0% 6% 48% 36% HEB 3 L 42% 97% 4% 45% 60% 47% HEB 3 F 13% 92% 1% 40% 88% 63% HEB 4 L 73% 96% 13% 80% 76% 41% HEB 4 F 92% 68% 13% 80% 76% 49% Using last Greenbook estimate. Full Sample is 1974Q4-2006Q4. Split sample is pre-1991 and post-1990
16 Bias? Summary of results What did we learn? Results largely insensitive to choice of outcome measure. (Bias in data revisions small?) More evidence of nonzero median than nonzero mean forecast error. (More power? or asymmetry?) Most evidence of bias is pre (except UNEMP) Less bias around 2Q horizons?
17 : Error Persistence? I H 0 : Consecutive forecast errors have the same sign 50 % of the time. p Values for persistence FE sign Full Sample First Half Second Half Concept Horizon Meeting Sign Signed Rank Sign Signed Rank Sign Signed Rank RECEIPTS 0 L 2% 0% 1% 1% 45% 6% RECEIPTS 0 F 0% 0% 3% 5% 2% 0% RECEIPTS 1 L 0% 5% 4% 29% 1% 12% RECEIPTS 1 F 1% 7% 2% 33% 16% 22% RECEIPTS 2 L 48% 89% 51% 88% 51% 45% RECEIPTS 2 F 48% 80% 85% 90% 51% 67% RECEIPTS 3 L 93% 97% 52% 85% 9% 8% RECEIPTS 3 F 61% 72% 52% 98% 9% 8% RECEIPTS 4 L 41% 11% 68% 37% 68% 37% RECEIPTS 4 F 6% 7% 68% 37% 68% 37% EXPEND 0 L 0% 0% 0% 0% 0% 0% EXPEND 0 F 0% 0% 0% 0% 0% 0% EXPEND 1 L 0% 0% 0% 1% 1% 6% EXPEND 1 F 0% 0% 0% 1% 0% 2% EXPEND 2 L 1% 9% 7% 56% 7% 71% EXPEND 2 F 1% 6% 7% 29% 7% 56% EXPEND 3 L 25% 67% 9% 72% 9% 72% EXPEND 3 F 25% 97% 52% 72% 9% 72% EXPEND 4 L 6% 7% 68% 37% 68% 74% EXPEND 4 F 6% 7% 68% 37% 68% 74% Full Sample is 1974Q4-2006Q4. Split sample is pre-1991 and post-1990
18 : Error Persistence? II H 0 : Consecutive forecast errors have the same sign 50 % of the time. p Values for persistence FE sign Full Sample First Half Second Half Concept Horizon Meeting Sign Signed Rank Sign Signed Rank Sign Signed Rank SURPLUS 0 L 0% 0% 10% 2% 1% 0% SURPLUS 0 F 0% 0% 3% 2% 1% 0% SURPLUS 1 L 0% 1% 0% 3% 10% 10% SURPLUS 1 F 0% 1% 4% 4% 1% 4% SURPLUS 2 L 2% 30% 7% 85% 7% 45% SURPLUS 2 F 1% 5% 1% 45% 1% 21% SURPLUS 3 L 25% 72% 9% 72% 52% 58% SURPLUS 3 F 7% 88% 52% 85% 52% 58% SURPLUS 4 L 91% 54% 68% 74% 68% 74% SURPLUS 4 F 91% 54% 68% 37% 68% 74% UNEMP 0 L 0% 2% 53% 88% 0% 0% UNEMP 0 F 0% 0% 3% 16% 0% 0% UNEMP 1 L 0% 0% 1% 3% 16% 3% UNEMP 1 F 0% 0% 0% 0% 0% 0% UNEMP 2 L 0% 1% 22% 17% 1% 2% UNEMP 2 F 0% 0% 0% 0% 0% 1% UNEMP 3 L 0% 0% 0% 8% 0% 8% UNEMP 3 F 0% 1% 9% 21% 9% 13% UNEMP 4 L 41% 23% 0% 37% 0% 37% UNEMP 4 F 41% 23% 0% 37% 0% 37% Full Sample is 1974Q4-2006Q4. Split sample is pre-1991 and post-1990
19 : Error Persistence? III H 0 : Consecutive forecast errors have the same sign 50 % of the time. p Values for persistence FE sign Full Sample First Half Second Half Concept Horizon Meeting Sign Signed Rank Sign Signed Rank Sign Signed Rank HEB6 0 L 54% 64% 2% 0% 0% 0% HEB6 0 F 79% 35% 0% 0% 0% 0% HEB6 1 L 59% 5% 8% 0% 2% 14% HEB6 1 F 48% 9% 8% 0% 0% 5% HEB6 2 L 14% 0% 0% 0% 7% 26% HEB6 2 F 14% 0% 0% 0% 1% 19% HEB6 3 L 25% 2% 9% 8% 9% 72% HEB6 3 F 7% 2% 9% 8% 9% 72% HEB6 4 L 6% 7% 68% 37% 68% 74% HEB6 4 F 6% 7% 68% 37% 68% 37% HEB 0 L 0% 0% 0% 0% 0% 0% HEB 0 F 0% 0% 2% 0% 0% 0% HEB 1 L 0% 1% 1% 3% 2% 14% HEB 1 F 0% 0% 1% 2% 0% 5% HEB 2 L 48% 56% 51% 82% 7% 26% HEB 2 F 1% 14% 22% 41% 1% 19% HEB 3 L 25% 96% 9% 58% 9% 72% HEB 3 F 7% 53% 9% 72% 9% 72% HEB 4 L 91% 54% 68% 74% 68% 74% HEB 4 F 91% 23% 68% 37% 68% 37% Full Sample is 1974Q4-2006Q4. Split sample is pre-1991 and post-1990
20 and Interest Rates Surplus Expenditures Receipts Horizon Concept First Last First Last First Last 0 Last bias bias bias bias Initial bias bias One Year bias bias bias bias Prebenchmark bias bias Last Initial One Year bias 0.59 Prebenchmark Last bias bias Initial One Year bias bias Prebenchmark HEB HEB6 Unemployment Horizon Concept First Last First Last First Last 0 Last bias bias bias bias Initial bias 0.20 One Year bias Last bias bias bias Initial One Year Last bias bias Initial One Year Full Sample is 1974Q4-2006Q4. The figures shown are p-values for tests of the null hypothesis that the coefficient on the lagged 4Q change in the federal funds rate is zero. (Ball and Croushore 2003)
21 I New real-time data set on basic fiscal policy variables. What have we learned so far? Most of the variation in the Surplus and Receipts 4Q ahead is a surprise Same is true for structural deficit This was not true before the Great Moderation. This is despite better performance in forecasting unemployment variations. Revenue forecasts have been too optimistic on average The Greenbook forecasts generally seem to forecast encompass those of the CBO (except for next year s receipts.) Most evidence of bias is restricted to pre-great Moderation (except UNEMP) Clear evidence of serial correlation in sign of forecast errors
22 II To come: (see WP FRB Philadelphia) Does the Fed react to expected structural deficits? (Yes.) How has Fiscal policy changed over time? (More countercyclical.)
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