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Federal Funds Rate Prediction

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Author Info
Sarno, Lucio
Thornton, Daniel L
Valente, Giorgio

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Abstract

We examine the forecasting performance of a range of time-series models of the daily U.S. effective federal funds (FF) rate recently proposed in the literature. We find that: (1) most of the models and predictor variables considered produce satisfactory one-day-ahead forecasts of the FF rate, (2) the best forecasting model is a simple univariate model where the future FF rate is forecast using the current difference between the FF rate and its target, and (3) combining the forecasts from various models generally yields modest improvements on the best performing model. These results have a natural interpretation and clear policy implications.

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Publisher Info
Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 37 (2005)
Issue (Month): 3 (June)
Pages: 449-71
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Handle: RePEc:mcb:jmoncb:v:37:y:2005:i:3:p:449-71

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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  1. PeterTillmann, 2004. "Cointegration and Regime-Switching Risk Premia in the U.S. Term Structure of Interest Rates," Computing in Economics and Finance 2004 53, Society for Computational Economics. [Downloadable!]
  2. Kirstin Hubrich & Kenneth D. West, 2008. "Forecast Evaluation of Small Nested Model Sets," NBER Working Papers 14601, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. William R. Emmons & Aeimit K. Lakdawala & Christopher J. Neely, 2006. "What are the odds? option-based forecasts of FOMC target changes," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 543-562. [Downloadable!]
  4. Peter Tillmann, 2003. "Cointegration and Regime-Switching Risk Premia in the U.S. Term Structure of Interest Rates," Bonn Econ Discussion Papers bgse27_2003, University of Bonn, Germany. [Downloadable!]
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  5. James D. Hamilton, 2007. "Assessing Monetary Policy Effects Using Daily Fed Funds Futures Contracts," NBER Working Papers 13569, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  6. Marco Lippi & Daniel L. Thornton, 2004. "A dynamic factor analysis of the response of U. S. interest rates to news," Working Papers 2004-013, Federal Reserve Bank of St. Louis. [Downloadable!]
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  7. Massimo Guidolin & Allan Timmerman, 2007. "Forecasts of U.S. short-term interest rates: a flexible forecast combination approach," Working Papers 2005-059, Federal Reserve Bank of St. Louis. [Downloadable!]
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  8. James D. Hamilton, 2008. "Assessing monetary policy effects using daily federal funds futures contracts," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 377-394. [Downloadable!]
  9. Bjørn-Roger Wilhelmsen & Andrea Zaghini, 2005. "Monetary policy predictability in the euro area: An international comparison," Working Paper 2005/7, Norges Bank. [Downloadable!]
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  10. Heinemann, Friedrich & Ullrich, Katrin, 2005. "Does it Pay to Watch Central Bankers? Lips? The Information Content of ECB Wording," ZEW Discussion Papers 05-70, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research. [Downloadable!]
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