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Federal Funds Rate Prediction

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  • Sarno, Lucio
  • Thornton, Daniel L
  • Valente, Giorgio

Abstract

We examine the forecasting performance of a range of time-series models of the daily US effective federal funds (FF) rate recently proposed in the literature. We find that: (i) most of the models and predictor variables considered produce satisfactory one-day-ahead forecasts of the FF rate; (ii) 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; (iii) 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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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4587.

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Date of creation: Sep 2004
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Handle: RePEc:cpr:ceprdp:4587

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Keywords: E47; federal fund rate; forecasting; nonlinearity; term structure;

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