OECD World Forum “Statistics, Knowledge and Policy,” Palermo, November The Use and Abuse of Real-Time and Anecdotal Information in Monetary Policymaking Evan F. Koenig Senior Economist and Vice President Federal Reserve Bank of Dallas Dallas, Texas USA

OECD World Forum “Statistics, Knowledge and Policy,” Palermo, November Main points Data revisions complicate policy Usually, revisions are not given proper treatment Anecdotal/qualitative information potentially valuable

OECD World Forum “Statistics, Knowledge and Policy,” Palermo, November Example of the revisions problem: U.S. monetary policy in the 1990s

OECD World Forum “Statistics, Knowledge and Policy,” Palermo, November Professional forecasters over-predicted inflation during most of the 1990s

OECD World Forum “Statistics, Knowledge and Policy,” Palermo, November A candidate explanation: profitability profitability = (labor productivity)/(real wage) = price/(labor cost per unit output) high profitability ⇒ ▪expand output and employment ▪raise wages or cut prices 1970s: productivity deceleration + sluggish real wage ⇒ low profitability 1990s: productivity acceleration + sluggish real wage ⇒ high profitability

OECD World Forum “Statistics, Knowledge and Policy,” Palermo, November Profitability movements explain much of the NAIRU’s variation

OECD World Forum “Statistics, Knowledge and Policy,” Palermo, November Profitability apparently a powerful long-leading unemployment indicator

OECD World Forum “Statistics, Knowledge and Policy,” Palermo, November Profitability estimates are subject to large revisions

OECD World Forum “Statistics, Knowledge and Policy,” Palermo, November Inflation pressures: revised vs. real time

OECD World Forum “Statistics, Knowledge and Policy,” Palermo, November Apples and oranges Data relevant for policy are 1st release or lightly revised (oranges) Forecasting models usually estimated using heavily revised data (apples)

OECD World Forum “Statistics, Knowledge and Policy,” Palermo, November Correct procedure: estimate using “real- time-vintage” data “Real-time vintage” = at each point in sample, the 1st release and lightly revised data then available Requires short data series of many vintages

OECD World Forum “Statistics, Knowledge and Policy,” Palermo, November Alternatives to conventional statistics: anecdotal & qualitative data “Who are you going to believe? Me or your lying eyes?” –Groucho Marx

OECD World Forum “Statistics, Knowledge and Policy,” Palermo, November The Federal Reserve collects anecdotal information: Through Directors of 12 regional Reserve Banks and their 25 Branches Through calls to business contacts prior to each FOMC meeting ▪Each Reserve Bank prepares a call summary ▪Summaries are assembled and released as the “Beige Book”

OECD World Forum “Statistics, Knowledge and Policy,” Palermo, November How useful is the Beige Book? Receives substantial press attention Has predictive power for output and employment

OECD World Forum “Statistics, Knowledge and Policy,” Palermo, November The collapse of high-tech industrial production

OECD World Forum “Statistics, Knowledge and Policy,” Palermo, November The collapse of high-tech industrial production

OECD World Forum “Statistics, Knowledge and Policy,” Palermo, November “Sales growth weakened sharply for producers of high-tech equipment.” “Businesses have begun to curtail technology-related investment.” “Consumer demand for PCs has been weakening since the Fall of 2000.” –FRB-Dallas Beige Book report, January 2001

OECD World Forum “Statistics, Knowledge and Policy,” Palermo, November ISM Report on Business Survey of 400 manufacturing firms, nationwide Orders, output, jobs, etc.: expanding, contracting, or unchanged? Numerical index = % expanding × (% unchanged) PMI = weighted average of component numerical scores

OECD World Forum “Statistics, Knowledge and Policy,” Palermo, November Goldman-Sachs study shows PMI a big market mover

OECD World Forum “Statistics, Knowledge and Policy,” Palermo, November Limitations of PMI/Beige Book Sampling not scientific (small, unrepresentative) Responses not properly weighted Beige Book difficult to interpret

OECD World Forum “Statistics, Knowledge and Policy,” Palermo, November Advantages of PMI/Beige Book Timely Little if any revision Respondents filter out short-term fluctuations

OECD World Forum “Statistics, Knowledge and Policy,” Palermo, November The PMI captures trends in factory output growth

OECD World Forum “Statistics, Knowledge and Policy,” Palermo, November The PMI captures trends in factory output growth

OECD World Forum “Statistics, Knowledge and Policy,” Palermo, November Summary and Conclusions Don’t trust charts/forecasts that mix apples (heavily revised data) and oranges (lightly revised data) Archive statistical releases! Anecdotal/qualitative information potentially quite helpful

OECD World Forum “Statistics, Knowledge and Policy,” Palermo, November