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The Federal Reserve Explains How Its Crystal Ball Works
Via The NY Fed's Liberty Street Economics blog,
Forecasting with the FRBNY DSGE Model
First in a five-part series
This series examines the Federal Reserve Bank of New York’s dynamic stochastic general equilibrium (FRBNY DSGE) model—a structural model used by Bank researchers to understand the workings of the U.S. economy and provide economic forecasts. The Federal Reserve Bank of New York (FRBNY) has built a DSGE model as part of its efforts to forecast the U.S. economy. On Liberty Street Economics, we are publishing a weeklong series to provide some background on the model and its use for policy analysis and forecasting, as well as its forecasting performance. In this post, we briefly discuss what DSGE models are, explain their usefulness as a forecasting tool, and preview the forthcoming pieces in this series.
The term DSGE, which stands for dynamic stochastic general equilibrium, encompasses a very broad class of macro models, from the standard real business cycle (RBC) model of Nobel prizewinners Kydland and Prescott to New Keynesian monetary models like the one of Christiano, Eichenbaum, and Evans. What distinguishes these models is that rules describing how economic agents behave are obtained by solving intertemporal optimization problems, given assumptions about the underlying environment, including the prevailing fiscal and monetary policy regime. One of the benefits of DSGE models is that they can deliver a lens for understanding the economy’s behavior. The third post in this series will show an example of this role with a discussion of the forces behind the Great Recession and the following slow recovery.
DSGE models are also quite abstract representations of reality, however, which in the past severely limited their empirical appeal and forecasting performance. This started to change with work by Schorfheide and Smets and Wouters. First, they popularized estimation (especially Bayesian estimation) of these models, with parameters chosen in a way that increased the ability of these models to describe the time series behavior of economic variables. Second, these models were enriched with both endogenous and exogenous propagation mechanisms that allowed them to better capture patterns in the data. For this reason, estimated DSGE models are increasingly used within the Federal Reserve System (the Board of Governors and the Reserve Banks of Chicago and Philadelphia have versions) and by central banks around the world (including the New Area-Wide Model developed at the European Central Bank, and models at the Norges Bank and the Sveriges Riksbank). The FRBNY DSGE model is a medium-scale model in the tradition of Christiano, Eichenbaum, and Evans and Smets and Wouters that also includes credit frictions as in the financial accelerator model developed by Bernanke, Gertler, and Gilchrist and further investigated by Christiano, Motto, and Rostagno. The second post in this series elaborates on what DSGE models are and discusses the features of the FRBNY model.
Perhaps some progress was made in the past twenty years toward empirical fit, but is it enough to give forecasts from DSGE models any credence? Aren’t there many critics out there (here is one) telling us these models are a failure? As it happens, not many people seem to have actually checked the extent to which these model forecasts are off the mark. Del Negro and Schorfheide do undertake such an exercise in a chapter of the recent Handbook of Economic Forecasting. Their analysis compares the real-time forecast accuracy of DSGE models that were available prior to the Great Recession (such as the Smets and Wouters model) to that of the Blue Chip consensus forecasts, using a period that includes the Great Recession. They find that, for nowcasting (forecasting current quarter variables) and short-run forecasting, DSGE models are at a disadvantage compared with professional forecasts. Over the medium- and long-run terms, however, DSGE model forecasts for both output and inflation become competitive with—if not superior to—professional forecasts. They also find that including timely information from financial markets such as credit spreads can dramatically improve the models’ forecasts, especially in the Great Recession period.
These results are based on what forecasters call “pseudo-out-of-sample” forecasts. These are not truly “real time” forecasts, because they were not produced at the time. (To our knowledge, there is little record of truly real time DSGE forecasts for the United States, partly because these models were only developed in the mid-2000s.) For this reason, in the fourth post of this series, we report forecasts produced in real time using the FRBNY DSGE model since 2010. These forecasts have been included in internal New York Fed documents, but were not previously made public. Although the sample is admittedly short, these forecasts show that while consensus forecasts were predicting a relatively rapid recovery from the Great Recession, the DSGE model was correctly forecasting a more sluggish recovery.
The last post in the series shows the current FRBNY DSGE forecasts for output growth and inflation and discusses the main economic forces driving the predictions. Bear in mind that these forecasts are not the official New York Fed staff forecasts; the DSGE model is only one of many tools employed for prediction and policy analysis at the Bank.
DSGE models in general and the FRBNY model in particular have huge margins for improvement. The list of flaws is long, ranging from the lack of heterogeneity (the models assume a representative household) to the crude representation of financial markets (the models have no term premia). Nevertheless, we are sticking our necks out and showing our forecasts, not because we think we have a “good” model of the economy, but because we want to have a public record of the model’s successes and failures. In doing so, we can learn from both our past performance and readers’ criticism. The model is a work in progress. Hopefully, it can be improved over time, guided by current economic and policy questions and benefiting from developments in economic theory and econometric tools.
* * *
And for some inisght into just how well the Fed has done...
The chart below, which summarizes 5 years of Fed "forward guidance" on that most critical of variables - the Fed Funds rate - proves two things:
i) there is nothing worse in this world than being a Fed Funds, or Eurodollar, trader, considering 5 years of forecasts have been systematically destroyed by a Fed which has failed time and time and time again to stimulate the economy enough to push it away from ZIRP (and why any hope for the first rate hike in mid-2015 are idiotic), and
ii) when it comes to central planning, the economists that now openly control the bond and stock market and increasingly more of global capital flows, have absolutely no idea what tomorrow brings perversely, since it is their actions that have made the required outcome - a self-sustaining, economic recovery - impossible.
* 8 *
No wonder they need a new crystal ball.
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Good...Gartman just said no need to own gold on CNBC, guess i will load up tomorrow.
These are all kinds o tools, for all kinds o fools.
Just wondering how ISIS can be doing 3 million a day, which is a billion a year, and there not being some frozen bank accounts and sacntions, etc.
http://www.huffingtonpost.com/2014/09/22/isis-funding_n_5850286.html
It is an 8 ball
Turn it over and it always says "buy moar Spy"
They "launder" it at their bank, First National CIA Bank and Trust. Their letters-of-credit are good at any MIC supply house.
An American, not US subject.
None of this shit works. Never has, and never will. It is impossible to forecast the price of half of dozen growth stocks a year from now. Only someone as arrogant and ignorant as a macro economist would think you can forecast an entire economy.
Just more voodoo bullshit mental maturbation. Fuck these assholes.
I think the thumbnail foto sums it up adequately.
4th turning Bitchez !!!!!!!1111
It's hocus pocus, baby! Sure, we can tell you the real details, in exchange for your soul.
Uh huh....
If it's not broke fiddle fuck with it.
If it's broke ignore it
And surround it with additional pablum
If Joe Sixpack disagrees
Throw him in debtors prison.
The King's Criers will tell you what's what, peasant.
The best way to make their ball or balls work, is to go to Home Depot and buy a good $4 hammer.
It comes with easy to follow instructions and is a good way to fix what is not working!
If not, Home Depot also sells crystal balls!
"dynamic stochastic general equilibrium" = they can make it show whatever they want.
"There are three kinds of lies: lies, damn lies, and statistics." - Mark Twain.
Forecasting with the FRBNY SLUDGE Model
First in a five-pile series of droppings
This series examines the Federal Reserve Bank of New York’s Stochastic Liability-Underwritten Dynamic General Equilibrium (FRBNY SLUDGE) model - an excretory model used by Bank bullshitters to obfuscate the workings of the U.S. economy and provide economic forecasts.
The term SLUDGE, which stands for Stochastic Liability-Underwritten Dynamic General Equilibrium, encompasses a very broad class of bullshit.
One of the benefits of SLUDGE models is that they can be thickly smeared across any lens for understanding the economy’s behavior.
SLUDGE models are also quite abstract representations of charlatanry, however, which enhances their incomprehensibility and limits their empirical appeal, as intended.
The rest of this report will focus on random samples of the Congressional Record and feature disjoint selections from complicated-looking mathematical texts for which the copyright has expired. This is because we've never known anyone to read past the fourth paragraph of these things before losing interest and doing something else.
they have a crystall ball? I thought they were just guessing and then look at where the gold price is at.
The Federal Reserve needs to grow two crystal balls and allow the free market to clear the mess. Painful but effective.
Once this is done, congress and the courts need to stop shielding the crooks who commit financial murder and escape with the spoils.
Excellent PP!!! I think the DSGE model is a spin-off from the BS-GE !! Just higher and deeper.
How Many Times Does This Need Saying,
There Is No Free Market,
There Has Never Been A Free Market,
There Never Will Be A Free Market,
Anywhere In Your Lifetime,
Whilst You Allow Any Other To Have Approval Over My Private Business.
How Fucking Hard Can It Be ?
So 'Anonymous Downvoter' care to spill the beans about why you like rigged markets ?
No ?
Didn't think so, Fuckwit, you like nanny to wipe your arse and protect you from making your own mistakes.
You are destined to repeat those mistakes and you will inflict your misguided decisions upon your offspring and others equaly.
HQ&D is too good for you.
Ooh Fed please help me, these financial crims are raping me and getting away with it.
Fed Creates The Opportunity
Congress Facilitates
Courts Say It's Legal
The raping will continue until morale improves
(you two are some sorry SOBs)
Hey Bob- maybe you should switch to de-caf. You seem a bit wound up. I don't disagree with you, and I didn't down vote you.
Note to self .. apparently stereotypical images of evil greedy Gypsy fortune tellers is not categorized as racial discrimination in any form
just as good as health.gov, oh, about forgot, the FEDRES is neither a government entity nor reserve. How the hell do they get away with it?
this is more justification for what the fed has already telegraphed it will do. there will be an early present in that dirty gym sock you hang above the monitor heater to dry out before you go to work in the morning. the fed will be dropping christmas money bombs(in the spirit of the new nobel peace prize) on every house in the usa in time thwart all the bad weather that is sure to plague anywhere there are potential consumers this christ...,uh, uh ...holiday season. in the words of that great 21st century orator, shrub, "buy, buy, buy."
Well,that's part of their storyline and right now these bankers seem intent on talking down the Euro and Yen and keeping the American Dollar stronger,so we can only wait and see what happens.We only have hindsight as human beings and predictions are just that,which are somebody's opinion and nothing more.It's kinda like Fibonacci,if enough people believe in the stuff and the algos got it programmed in,then go with the flow.Why try fight it?Everybody's preaching the shit.I can't fight it except to save some of my fiat-paper profits in gold and silver.
Banksters: "Chrystal ball, Chrystal ball, who's the fairest of them all."
Crystal ball: "Certainly not you thieving criminals."
An American, not US subject.
"Guillotine the Fed!"
Garbage in/garbage out. We don't need no stinking DSGE to know it's all downhill from here.
"...This is why all of modern economics is quackery with respect to statistics, forecasting, results, adjustments, readjustments, and readjustments of the initial mis-readjusted-adjustment of the previous results which were incorrectly forecast by the hopefully now forgotten statistical quackery. Please read that last sentence again. Could Henry Ford have run his business by such nonsense? However, tyranny runs the entire economy, everyone's lives, by such buffoonery. "That that which causes derivative truths to be true is most true." Thus by the first principle of money we know that it is counterfeit that tyranny is proliferating, not money, and this is the reason why all of tyranny's economic forecasting and actual measures are invariably wrong; modern Rasputins are forecasting and calculating as if there were a proliferation of productive work, money, and then befuddled into lying, cheating, deceiving, and swindling their ongoing parasitic livelihoods when the natural effect of counterfeiting contradicts their mystic visions. For example, Gross Domestic Production is determined by measuring how much spending is done over a duration of time. Spending of what? Money or counterfeit? Since it is the spending of counterfeit then it cannot represent the introduction of value to any mediation of exchange and instead must represent the theft of value. Therefore, the more that authoritarian bankers help, aid, stimulate, invigorate, rescue and fuel the "growth" of any economy then the exact opposite is true.
If anyone were to want to sincerely advocate, foster, nurture, and ensure long lasting genuine growth and prosperity, then by the Blaze of Day stop the counterfeiting." -http://ocsure.blogspot.com/2014/08/ventriloquism-of-lies-blinds-opponents.html
And to paraphrase Aristotle's refutation of Plato's Forms: Why are you inventing what you claim to be abstract representations of reality as the means of claiming to know reality?
if i create a model choosing the variables and their assigned values to the data that i collect purposely to fit into this model or can create at will to fit into this model then it is safe to say i can make the model do and say whatever i want it to say, kinda like a puppet on a string(10pts. name that tune).
i think that is what they mean by the equilibrium part of the name. put together it sounds like an edict to create order out of chaos.
Voltare said it best (paraphrased): "All fiat currency will eventually realise its true value".
the fed is a gaggle of hilariously clueless drips. to bad our overlords have handed them the key to limitless power. oh well. and yeah, i am just waiting to sel the dec-dec 16-17 ed spread above 125 bips as it heads back down to 5 bips where a former 1 yr ed spread was about 2 years ago. the onl thing coming here is recession and deflation like you have never seen before. as stated in the zh notes above, the idea of fed funds being raised next year is risible.
Don't believe it. Those fuckers lie.
One of the benefits of DSGE models is that they can deliver a lens for understanding the economy’s behavior
Rose-tinted glasses, that explains everything.
fed crystal ball = user's manual for printer