What are indicators of ineffective policy?

How are Google searches improving monetary policy?

• 's Aki Ito and Alisa Odenheimer report: The central bank stands at the forefront of the world’s hunt for new economic indicators, analyzing keyword counts for everything from aerobics classes to refrigerators -- reported by Google almost as soon as the queries take place -- to gauge consumer demand before official statistics are released. The Federal Reserve and the central banks of England, Italy, Spainand Chile have followed up with their own studies to see if search volumes track trends in the economies they oversee. At stake is the ability of the guardians to deploy nimbler policy responses. Greater foresight could make the difference between a slowdown and a recession ... http://www.bloomberg.com/news/2012-08-02/your-119-billion-google-searches-now-a-central-bank-tool.html

• Answer:

  I think using search engine or social data can help add context and color to the other traditional data inputs into economic forecasting such as housing starts, unemployment rate, etc.  However, I see no evidence that it is today providing radically new insight which would alter monetary policy by the Fed or other Central Banks. Furthermore, using real-time social or search data to make economic forecasts can actually be quite misleading as monetary policy by its very nature takes time to cycle through the economy.  Something that is trending up today in Google or Twitter may very well disappear a week from now. That is not to say that the Fed doesn't look at real-time data such as the stock market index or the bond yields.  I'm sure they track every second of it, and if there was to be a huge swing in the capital markets, I'm sure they would step in quickly to act.  However, the stock and bond markets have immediate real-time economic impacts such as how much people pay for mortgage rates.  People typing in the search term 'mortgage' does not translate into a change in actual mortgage rates.  It is simply correlated to the actual market conditions, and you're simply seeing the consumer response to it. It is a predictable signal of consumer demand that could have been easily derived through existing data sets. As with anything else, this could of course change in the future if we got really good at deriving future economic forecasts using Google and Twitter feeds.  For now, no.