St. Louis Fed's Review: Federal Response to Home Mortgage Distress; FOMC Consensus Forecasts; Laffer Traps and Monetary Policy; Forecasting Inflation and Output: Comparing Data-Rich Models with Simple Rules


ST. LOUIS — The May/June issue of Review, the Federal Reserve Bank of St. Louis' journal of economic and business issues, features the following articles. The publication is also available on the St. Louis Fed's web site:

  • "The Federal Response to Home Mortgage Distress: Lessons from the Great Depression." The distress in housing and mortgages markets today is often characterized as similar to the collapse of the 1930s. Could major initiatives similar to those employed during the Great Depression stem the tide of our current loan defaults and foreclosures? Reviewing the economic data of the two time periods, economist David C. Wheelock identifies similarities and differences in the underlying causes of mortgage distress during the two periods. He concludes that although history can provide valuable insights, conditions today are sufficiently different to caution against drawing strong policy lessons from the Great Depression experience.
  • "FOMC Consensus Forecasts." On Nov. 14, 2007, the FOMC announced a change in the way it communicates its view of the economic outlook, when it increased both the frequency of the forecast and the forecasting horizon. The FOMC, however, decided to continue the practice of releasing forecast information as a range of forecasts, both the full range between the high and the low and a central tendency that omits the extreme values. To prove the validity of practice, economist William T. Gavin and researcher Geetanjali Pande used individual forecasting data from the Survey of Professional Forecasters (SPE) to mimic the FOMC's central tendency method. They conclude that since the midpoint of the central tendency matches closely with both the mean and median of the forecasts, the midpoint of the FOMC central tendency is a reliable measure of the policymakers consensus.
  • "Laffer Traps and Monetary Policy."When it comes to assessing the impact of active fiscal policies, it is important to understand how they interact with independent monetary policies that may be active or passive. The intention of this article is to argue that switching to an active monetary policy may push the economy toward the high-welfare equilibrium and rule out expectation-driven business cycles. Patrick A. Pintus, professor of economics at Universit de la Mditerrane and GREQAM-IDEP, suggests that one way to push the economy toward the good steady state is to abandon passive monetary policies in favor of adopting an active monetary rule. Under this commitment, welfare is higher in every period and expectation-driven business cycles are ruled out.
  • "Forecasting Inflation and Output: Comparing Data-Rich Models with Simple Rules." When forecasting or measuring economic shocks, dynamic factor methods can be used to incorporate a wide range of economic information. Economists William T. Gavin and Kevin L. Kliesen found that, over the past decade, the data-rich models significantly improved the forecasts for a variety of real output and inflation indicators. For all of the series that they examined, with the exception of the unemployment rate, the authors found that the data rich-models become more useful when forecasting over longer horizons.

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