Discussion of Presentations on Real-Time Data Analysis

Dean Croushore

Associate Professor, University of RichmondVisiting Scholar, Federal Reserve Bank of Philadelphia

May 2008

Data Sets

• Real-Time Data Set for Macroeconomists• Philadelphia Fed (Tom Stark)

• Need for good institutional support

• Club good: non-rival but excludable

Data Sets

– Unrestricted access:• U.S.: Philadelphia Fed, St. Louis Fed, BEA• OECD• Bank of England (recently updated)

– Restricted access:• EABCN

– Fate unclear:• Canada

– One-time research projects:• Many, most not continuously updated

Role of Researchfor Data Production

• Analysis of data revisions is not criticism of government statistical agencies!– May help agencies improve data production

process– Revisions reflect limited resources devoted to

data collection– Revised data usually superior to unrevised

data (U.S. CPI vs. PCE price index)

Monetary Policy: Data Revisions

• How Much Does It Matter for Monetary Policy that Data Are Revised?– Example: Fed’s favorite inflation measure is

the Personal Consumption Expenditures Price Index Excluding Food & Energy Prices (core PCE inflation)

– But it has been revised substantially; similar to revisions to overall PCE inflation, as Bob Tetlow showed

Monetary Policy: Data Revisions

• How Much Does It Matter for Monetary Policy that Data Are Revised?– Charts show that instead of worrying about a

substantial unwanted decline in inflation, the Fed should have been worried about a rise in inflation

Figure 1Core PCE Inflation Rate from 1997Q1 to 2002Q1, Vintage May 2002

1.0

1.2

1.4

1.6

1.8

2.0

2.2

2.4

1997 1998 1999 2000 2001 2002

Date

Infl

atio

n R

ate

Figure 3Core PCE Inflation Rate from 1997Q1 to 2002Q1, Vintages May 2002, Dec. 2003, Aug. 2005

1.0

1.2

1.4

1.6

1.8

2.0

2.2

2.4

1997 1998 1999 2000 2001 2002

Date

Infl

atio

n R

ate

August 2005

May 2002

Dec 2003

Monetary Policy: Data Revisions

• How Much Does It Matter for Monetary Policy that Data Are Revised?– Simple regressions show that the annual

revision of PCE inflation data (both overall and core) is forecastable

Current Analysis

• How Can Real-Time Data Be Used for Current Analysis?– Domenico Giannone’s research: extract real-

time information to determine a real shock and a nominal shock, which represent fundamental dynamics of US economy

– Surprising findings: surveys (especially Philadelphia Fed Business Outlook Survey) matter significantly

Current Analysis

• Remaining issue: how helpful is nowcasting for monetary policy?– Fed spends many resources on nowcasting,

but policy works with a lag, so forecasting is more important

– Does nowcasting better help us forecast better?

– Or are forecasts at the policy horizon unaffected by the nowcast?

Monetary Policy: Analytical Revisions

• What Happens When Economists or Policymakers Revise Conceptual Variables?– Output gap– Natural rate of unemployment– Equilibrium real interest rate

• Concepts are never observed, but are centerpiece of macroeconomic theory

Monetary Policy: Analytical Revisions

• Research: Fed overreacted to perceived output gap in 1970s, causing Great Inflation; but output gap was mismeasured– Very difficult to measure output gap in real

time (Simon van Norden)– Different methods lead to very different output

gap measures; hard to choose “best” method– Productivity growth is revised substantially, so

forecasting output gap is problematic

Monetary Policy: Analytical Revisions

• Policy models may change:– Tetlow-Ironside (2007): changes in FRB-US

model changed the story the model was telling to policymakers

– Model changes exacerbated by data revisions

Monetary Policy: Analytical Revisions

• What Happens When Economists or Policymakers Revise Conceptual Variables?– Key issue: end-of-sample inference for

forward-looking concepts (filters)– Key issue: optimal model of evolution of

analytical concepts• Most work is statistical; perhaps a theoretical

breakthrough is needed