Has the Economy Become More Predictable? Changes in Greenbook Forecast Accuracy

Abstract

Several researchers have recently documented large reductions in economic volatility. But a more important question may be whether the economy has become more predictable. Using forecasts from the Federal Reserve Greenbooks, I find that inflation and output have become more predictable, though the results for output are somewhat mixed. The reductions in unpredictability (if any) are significantly smaller than reductions in volatility. Associated with this, the predictable component of fluctuations in output and inflation has virtually disappeared.