28 August 2012

Partisan Inflation Forecast Errors & Hurricanes

Soon to be Hurricane Isaac has thrown off mine and my coauthor Cassie Grafström's plans to present a paper at the APSA Annual Conference. The paper is on whether or not US Federal Reserve staff bias their inflation forecasts based on the president's party. In lieu of the actual presentation I thought that I would at least post our slides (below).

In a couple earlier posts I showed some graphs indicating that there might be a presidential partisan bias to Fed inflation forecasts. The bias would look like this:

  • Democratic Presidents: Inflation is over-estimated.
  • Republican Presidents: Inflation is under-estimated.

In our paper we try to find out if this is just a coincidence or if inflation forecasts are really biased by the president's party identification. After running many different models we find that, yes Fed staff predict inflation will be higher than it actually is during Democratic presidencies and lower than it is during Republican presidencies.

This figure from the paper gives you a sense of how big we predict the inflation forecast errors will be under Republican and Democratic presidents.

Simulated Inflation Forecast Errors
Simulated Expected Inflation Forecast Error (Gandrud & Grafström)
0 = no forecasting error

Inflation is expected to be about 10% higher than it actually is during Democratic presidencies. It is expected to be about 20% lower than it actually is during Republican presidencies. I'll write another post describing how we made this graph and a few others in the paper.

Now for the slides from our ill-fated APSA presentation (you can find the full paper here):