The Impact of Uncertainty on the Feasibility of Humphrey-Hawkins Objectives

• Published in: The Journal of finance (New York) 1981-05, Vol.36 (2), p.489-496
• Main Authors: TINSLEY, P., BERRY, J., FRIES, G., GARRETT, B., NORMAN, A., SWAMY, P. A. V. B., VON ZUR MUEHLEN, P.
• Format: Article
• Language: English
• Subjects: Analytical forecasting; Board of Governors of the Federal Reserve System; Coefficients; Current Monetary Policy Research at the Federal Reserve Board; Economic models; Economic policy; Economic uncertainty; Federal Reserve monetary policy; Gross national product; Humphrey Hawkins Full Employment Act 1978-US; Macroeconomic modeling; Monetary aggregates; Objectives; Probabilities; Stochastic models; Uncertainty
• ISSN: 0022-1082; 1540-6261
• DOI: 10.1111/j.1540-6261.1981.tb00466.x

Ambiguities in interpreting Humphrey-Hawkins (HH) reports include the: 1. hindsight interpretation, 2. forecast interpretation, and 3. contractual interpretation. These ambiguities could be eliminated by formulating a straightforward appraisal of HH reports which views the process of policy selection as a maximum likelihood estimation procedure, in which the optimal coefficient estimates maximize the likelihood of obtaining the observed data (the HH objectives). A stochastic framework for coordination of macroeconomic policies is introduced which suggests: 1. measures of policy accountability should allow for the climate of uncertainty which permeates policy decisions; and 2. most models of aggregate economic activity impose arbitrary specifications of uncertainty which do not appear to be empirically justifiable. An econometric model proposes alternative allocation of uncertainty compared to most models. The research provides an overview of recent work by members of the Special Studies section of the Federal Reserve Board on the role of uncertainty in policy forecasts, and it is based on previous work.