Federal Reserve forecasts of nonfarm payroll employment across different political regimes

Abstract

Purpose

This study is motivated by the view that Democrats are concerned with reducing unemployment in the short‐run, while Republicans are concerned with keeping inflation low to promote economic stability and growth. The purpose of this paper is to ask whether the Federal Reserve forecasts of nonfarm payroll employment are accurate and free of systematic bias during the 1977‐2000 Democratic and Republican administrations.

Design/methodology/approach

The authors employ comparable forecasts from a univariate autoregressive integrated moving‐average (ARIMA) model to assess forecast accuracy. An ARIMA model efficiently utilizes past information and thus yields desirable forecasts commonly used as benchmarks.

Findings

Federal Reserve forecasts during the Democratic Administrations, while failing to outperform the ARIMA forecasts, display systematic under‐prediction. Such evidence is consistent with a discretionary approach to monetary policy when the bias is in the direction of full employment. During the Republican Administrations, the Federal Reserve forecasts, while superior to the ARIMA forecasts, are free of systematic bias. This, we argue, is consistent with a monetary policy that approximated the Taylor rule.

Research limitations/implications

The distinct behavior over the two administrations is unique to the nonfarm payroll employment forecasts and cannot be substantiated for the Federal Reserve forecasts of other macroeconomic variables.

Originality/value

This study provides new insights into the monetary policies pursued during the 1977‐2000 Democratic and Republican administrations. The findings are useful and informative for the design and implementation of monetary policy.

Citation

Baghestani, H. and Poulson, B. (2012), "Federal Reserve forecasts of nonfarm payroll employment across different political regimes", Journal of Economic Studies, Vol. 39 No. 3, pp. 280-289. https://doi.org/10.1108/01443581211245874