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Which Model to Forecast the Target Rate?

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  • Maarten van Oordt

Abstract

Specifications of the Federal Reserve target rate that have more realistic features mitigate in-sample over-fitting and are favored in the data. Imposing a positivity constraint and discrete increments significantly increases the accuracy of model out-of-sample forecasts for the level and volatility of the Federal Reserve target rates. In addition, imposing the constraints produces different estimates of the response coefficients. In particular, a new and simple specification, where the target rate is the maximum between zero and the prediction of an ordered-choice Probit model, is more accurate and has higher response coefficients to information about inflation and unemployment.

Suggested Citation

  • Maarten van Oordt, 2017. "Which Model to Forecast the Target Rate?," Staff Working Papers 17-60, Bank of Canada.
    • Handle: RePEc:bca:bocawp:17-60
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Financial markets; Interest rates;

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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