Attending the seminar were the three members of the Council of Economic Advisers: Dr. Joseph Stiglitz (chairman); Dr. Alicia Munnell; and Dr. Jeffrey Frankel; and the Honorable Laurence Meyer, of the Federal Reserve Board of Governors.

The participants of the Model Comparison Seminar attending this session included: Prof. F. Gerard Adams, Univ. of Pennsylvania; Prof. Albert Ando, Univ. of Pennsylvania; Dr. Daniel Bachman, the WEFA Group; Prof. Gregory Chow, Princeton University; Dr. Robert Curran, Primark Decision Economics; Prof. Michael Donihue, Colby College; Dr. Kurt Karl, the WEFA Group; Prof. Lawrence Klein, University of Pennsylvania; Prof. Eugene Kroch, Villanova University; Dr. Mark Lasky, DRI/McGraw-Hill; Dr. Joel Prakken, Macroeconomic Advisers; Dr. Allen Sinai, Primark Decision Economics; Dr. Peter Taylor, US Air Force Academy; and Dr. Charles Renfro.

Also present were Dr. Stephen Braun and Dr. William English, senior economists at the CEA; and Mark Wasserman and Robert Anderson from the Office of Management and Budget.

Following a brief welcome by Dr. Stiglitz, Michael Donihue provided an overview of the current economic outlook from those participants who maintain models and produce economic forecasts. Seven modelers provided quarterly forecasts through the year 2001 for the purposes of this meeting.

[The charts and a summary table from Prof. Donihue's presentation are available in the downloadable file: chartstble101896.pdf (162K). You will need a copy of the free software program Adobe Acrobat Reader to view this file.]

Prof. Klein began the discussion of the current outlook with a forecast from the current quarter model he maintains with Dr. Ju Yong Park at the University of Pennsylvania. Using data available as of October 14, 1996 their model forecasts current (third) quarter real GDP growth of 2.16% (annual rate) and growth in 1996q4 of 2.37%. Inflation, as measured by the chain-type price index for personal consumption expenditures is forecast to be 1.84%, at annual rates, in the current quarter and 2.11% in 96q4. Klein also noted the recent shift in statistical discrepancy item in the National Accounts, as reported by the BEA, to a substantial negative value as measurement of the income side of the economy dominates a relatively weaker expenditure side.

Alan Sinai provided a detailed assessment of his outlook, noting that the economy was structurally very sound and that the past 4 years had been marked by a period of few, if any, external shock to the real economy and no policy errors on either the part of the Administration and Congress or the Federal Reserve. Sinai foresees a growth recession (growth below potential) in 1998-99, but agreed with the consensus of forecasters that overall GDP growth would be positive throughout the next 5 years. Sinai noted that high unit labor costs were putting slight upward pressure on prices. Sinai estimated the NAIRU at approximately 5.1 or 5.2 percent, but noted the difficulty in defining and measuring the concept. Sinai was also uncomfortable with pegging the rate of potential output growth to a particular number due to the problems of definition and measurement. Many of the seminar participants expressed concerns over the measurement of productivity, in particular, and the belief that the data do not seem consistent with measured behavior among other variables. In answer to the question, how will we know if the economy is overheating, Sinai suggests looking at the financial markets and price levels. Wages are a leading indicator of overheating, but must be considered in the context of behavior in other sectors of the economy.

Joel Prakken followed by addressing specifically the questions posed by members of the CEA. In response to the question concerning potential output growth, Prakken cited the BLS estimate of labor force growth of between 1 to 1.1% and the reported trend rate of growth of productivity at 1.2% from which we can infer a potential output growth rate of around 2.2 to 2.3%. The wage-wage Phillips Curve in his model (using hourly compensation to be consistent with the productivity data) implies a NAIRU of about 5.9%. Prakken also foresees a continued decline in computer prices over the forecast horizon. At Macroeconomic Advisers, they model uncertainty for their clients by simulating alternative policy scenarios. Turning to the current quarter outlook, Prakken predicted weak final sales growth this quarter as inventory accumulation could be as high as $40 billion. He predicted real GDP growth of between 2% and 2.5%. The fourth quarter should show a rebound in final sales as firms try to get inventories back to sustainable levels, according to Prakken. He views the current stance of monetary policy as slightly restrictive and agreed with Sinai that the current expansion is due largely to the absence of policy errors or external shocks. Prakken is not predicting a growth recession, rather output growth at, or near, potential throughout the forecast horizon. Prakken also noted a lack of confidence in the productivity data as reported.

Kurt Karl began his discussion with the notion that recessions occur because of Fed mistakes and that there hadn't been any mistakes during the current expansion. The WEFA group is forecasting an increase in labor force participation in response to recent real wage increases. Karl put his estimate of NAIRU at 5.7%, but noted that realistically it could range between 5% and 6%. With trend productivity growth just above 1% he also estimates potential GDP growth at around 2.1% to 2.2%, noting a forthcoming decline as labor force growth slows after the year 2001. Karl predicted that current quarter GDP growth would be about 1.9% with sluggish growth in consumer spending attributable, in part, to auto sales. Karl noted an increase in consumer credit tightening as bankruptcies and delinquencies are on the uptick. He also pointed out that exports have not shown the anticipated growth of late. As to how he will recognize overheating in the economy, Karl watches real wage gains relative to productivity growth.

Danny Bachman responded to the question concerning falling computer prices by drawing the analogy with health care prices which have been rising at rates substantially above the rate of overall consumer price inflation for decades. Bachman also noted that prices in other sectors, notably communication, have fallen at a similar pace for many, many years. As to modeling uncertainty, the WEFA group places subjective confidence intervals on alternative scenarios, e.g., pessimistic versus optimistic outlooks.

The discussion then turned to some specific questions from members of the CEA concerning details of the forecasts and the methods for modeling uncertainty. Dr. Stiglitz suggested that one interesting simulation for the group might be to model Fed behavior under a scenario where the FOMC waits for successively longer periods of time before tightening monetary policy in response to an economic shock or event like tightening labor markets. Some of the questions he posed were: What happens to GDP? What is the cost of waiting? What role does uncertainty, in a stochastic sense, play?

Prior to the lunch break, Donihue introduced the WEB resources for the seminar and noted the working paper series which could be accessed through the internet. The two sessions at the upcoming AEA meetings were highlighted and there was some discussion as to the structure and scope of the roundtable concerning the use of structural macro models in policy analysis and forecasting.

During lunch the seminar revisited the issue of the future of the group and how to secure funding. It was once again agreed that the seminar must establish its academic credentials in order to remain viable and accomplish it goals. Toward that end, Charles Renfro offered the Journal of Economic and Social Measurement, as a publishing forum for the seminar. A forthcoming issue will include articles from members of the seminar on the treatment of the new NIPA data in the construction of structural macroeconometric models. As editor, he believes that the types of issues this seminar addresses on a regular basis are consistent with the type of articles this journal wants to publish.

After lunch the seminar turned to an update of the ASPEN project presented at the June 1996 meeting in Boston and the research agenda of the seminar. The APSEN project is still looking for long-term funding, but has added a foreign sector to their model since the last meeting of the seminar.

It was noted that Phil Howrey's project on comparative monetary policy rules exercises was open to additional participants. The results of these exercises, in addition to Stephen McNees' research on forecast uncertainty, will be presented at the upcoming AEA meetings in January.

Michael Donihue and Allen Sinai presented their proposed topic of comparative NAIRU exercises. Much of the discussion surrounded the implementation of the experiments and all modelers agreed to participate. Donihue will send out a copy of the survey to all participants and instructions to modelers on how the preliminary simulations are to be implemented.

Gene Kroch proposed a set of comparison exercises designed to better understand the modeling of the foreign sector of the economy. All modelers agree to send to Kroch a copy of the documentation of the foreign sector, including parameter estimates and guidelines for calculating the implied income and price elasticities.

The final item was a report by Michael Donihue on past forecast accuracies. Donihue provided tables summarizing the mean errors and RMSEs for the forecasts presented at eight of the past seminar meetings. There was little consensus as to what to do with these data, however there was some interest in an event study of the 1990-91 recession.

[Tables from Prof. Donihue's presentation on forecast accuracies are available in the downloadable file: accuracies101896.pdf (22K). You will need a copy of the free software program Adobe Acrobat Reader to view this file.]

The next meeting of the model comparison seminar is tentatively scheduled for late April 1997 in New York City.

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