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Forecasting the FOMC's interest rate setting behavior: a further analysis

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Author Info

  • Hyeongwoo Kim

    (Auburn University, Alabama, USA)

  • John Jackson

    (Auburn University, Alabama, USA)

  • Richard Saba

    (Auburn University, Alabama, USA)

Abstract

We develop a model to forecast the Federal Open Market Committee's (FOMC's) interest rate setting behavior in a nonstationary discrete choice model framework by Hu and Phillips (2004). We find that if the model selection criterion is strictly empirical, correcting for nonstationarity is extremely important, whereas it may not be an issue if one has an a priori model. Evaluating an array of models in terms of their out-of-sample forecasting ability, we find that those favored by the in-sample criteria perform worst, while theory-based models perform best. We find the best model for forecasting the FOMC's behavior is a forward-looking Taylor rule model. Copyright © 2008 John Wiley & Sons, Ltd.

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File URL: http://hdl.handle.net/10.1002/for.1099
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Bibliographic Info

Article provided by John Wiley & Sons, Ltd. in its journal Journal of Forecasting.

Volume (Year): 28 (2009)
Issue (Month): 2 ()
Pages: 145-165

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Handle: RePEc:jof:jforec:v:28:y:2009:i:2:p:145-165

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Web page: http://www3.interscience.wiley.com/cgi-bin/jhome/2966

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Cited by:
  1. Dick van Dijk & Robin L. Lumsdaine & Michel van der Wel, 2014. "Market Set-Up in Advance of Federal Reserve Policy Decisions," NBER Working Papers 19814, National Bureau of Economic Research, Inc.
  2. van den Hauwe, Sjoerd & Paap, Richard & van Dijk, Dick, 2013. "Bayesian forecasting of federal funds target rate decisions," Journal of Macroeconomics, Elsevier, vol. 37(C), pages 19-40.
  3. repec:syb:wpbsba:01/2013 is not listed on IDEAS
  4. Sjoerd van den Hauwe & Dick van Dijk & Richard Paap, 2011. "Bayesian Forecasting of Federal Funds Target Rate Decisions," Tinbergen Institute Discussion Papers 11-093/4, Tinbergen Institute.
  5. Hyeongwoo Kim, 2014. "Estimating Interest Rate Setting Behavior in Korea: An Ordered Probit Model Approach," Auburn Economics Working Paper Series auwp2014-02, Department of Economics, Auburn University.

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