Advanced Search
MyIDEAS: Login to save this paper or follow this series

Bayesian Forecasting of Federal Funds Target Rate Decisions

Contents:

Author Info

  • Sjoerd van den Hauwe

    (Erasmus University Rotterdam)

  • Dick van Dijk

    (Erasmus University Rotterdam)

  • Richard Paap

    (Erasmus University Rotterdam)

Abstract

This paper examines which macroeconomic and financial variables are most informative for the federal funds target rate decisions made by the Federal Open Market Committee (FOMC) from a forecasting perspective. The analysis is conducted for the FOMC decision during the period January 1990 - June 2008, using dynamic ordered probit models with a Bayesian endogenous variable selection methodology and real-time data for a set of 33 candidate predictor variables. We find that indicators of economic activity and forward-looking term structure variables as well as survey measures have most predictive ability. For the full sample period, in-sample probability forecasts achieve a hitrate of 90 percent. Based on out-of-sample forecasts for the period January 2001 - June 2008, 82 percent of the FOMC decisions are predicted correctly.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://papers.tinbergen.nl/11093.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 11-093/4.

as in new window
Length:
Date of creation: 15 Jul 2011
Date of revision:
Handle: RePEc:dgr:uvatin:20110093

Contact details of provider:
Web page: http://www.tinbergen.nl

Related research

Keywords: Federal funds target rate; real-time forecasting; dynamic ordered probit; variable selection; Bayesian analysis; importance sampling;

Other versions of this item:

Find related papers by JEL classification:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Evan F. Koenig, 2002. "Using the Purchasing Managers' Index to assess the economy's strength and the likely direction of monetary policy," Economic and Financial Policy Review, Federal Reserve Bank of Dallas.
  2. Fackler, James S., 2002. "Comment on 'Forecasting with a real-time data set for macroeconomists'," Journal of Macroeconomics, Elsevier, Elsevier, vol. 24(4), pages 559-562, December.
  3. Michael Dueker, 1998. "Conditional heteroskedasticity in qualitative response models of time series: a Gibbs sampling approach to the bank prime rate," Working Papers, Federal Reserve Bank of St. Louis 1998-011, Federal Reserve Bank of St. Louis.
  4. Heikki Kauppi, 2012. "Predicting the Direction of the Fed's Target Rate," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 31(1), pages 47-67, 01.
  5. Eichengreen, Barry & Watson, Mark W & Grossman, Richard S, 1985. "Bank Rate Policy under the Interwar Gold Standard: A Dynamic Probit Model," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 95(379), pages 725-45, September.
  6. James H. Stock & Mark W. Watson, 2001. "Forecasting Output and Inflation: The Role of Asset Prices," NBER Working Papers 8180, National Bureau of Economic Research, Inc.
  7. Dean Croushore & Tom Stark, 1999. "A real-time data set for macroeconomists," Working Papers 99-4, Federal Reserve Bank of Philadelphia.
  8. Francis X. Diebold & Glenn D. Rudebusch, 1989. "Forecasting output with the composite leading index: an ex ante analysis," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 90, Board of Governors of the Federal Reserve System (U.S.).
  9. Hayo, Bernd & Neuenkirch, Matthias, 2010. "Do Federal Reserve communications help predict federal funds target rate decisions?," Journal of Macroeconomics, Elsevier, Elsevier, vol. 32(4), pages 1014-1024, December.
  10. Ben S. Bernanke & Kenneth N. Kuttner, 2004. "What Explains the Stock Market's Reaction to Federal Reserve Policy?," NBER Working Papers 10402, National Bureau of Economic Research, Inc.
  11. Torben G. Andersen & Tim Bollerslev & Francis X. Diebold & Clara Vega, 2006. "Real-time price discovery in global stock, bond and foreign exchange markets," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 871, Board of Governors of the Federal Reserve System (U.S.).
  12. Evan F. Koenig & Sheila Dolmas & Jeremy Piger, 2003. "The Use and Abuse of Real-Time Data in Economic Forecasting," The Review of Economics and Statistics, MIT Press, vol. 85(3), pages 618-628, August.
  13. Andrew Ang & Geert Bekaert & Min Wei, 2005. "Do Macro Variables, Asset Markets or Surveys Forecast Inflation Better?," NBER Working Papers 11538, National Bureau of Economic Research, Inc.
  14. Campbell, Sean D. & Diebold, Francis X., 2005. "Stock returns and expected business conditions: Half a century of direct evidence," CFS Working Paper Series 2005/22, Center for Financial Studies (CFS).
  15. Rudebusch, Glenn D., 2002. "Term structure evidence on interest rate smoothing and monetary policy inertia," Journal of Monetary Economics, Elsevier, Elsevier, vol. 49(6), pages 1161-1187, September.
  16. Elliott, Graham, 2002. "Comments on 'Forecasting with a real-time data set for macroeconomists'," Journal of Macroeconomics, Elsevier, Elsevier, vol. 24(4), pages 533-539, December.
  17. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 39(1), pages 195-214, December.
  18. George Monokroussos, 2006. "Dynamic Limited Dependent Variable Modeling and U.S. Monetary Policy," Discussion Papers 06-02, University at Albany, SUNY, Department of Economics.
  19. Gernot Doppelhofer & Melvyn Weeks, 2009. "Jointness of growth determinants: Reply to comments by Rodney Strachan, Eduardo Ley and Mark F.J. Steel," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 24(2), pages 252-256, 03.
  20. Dean Croushore, 2011. "Frontiers of Real-Time Data Analysis," Journal of Economic Literature, American Economic Association, vol. 49(1), pages 72-100, March.
  21. Ehrmann, Michael & Fratzscher, Marcel, 2005. "Transparency, disclosure and the federal reserve," Working Paper Series, European Central Bank 0457, European Central Bank.
  22. Michael J. Dueker & Robert H. Rasche, 2004. "Discrete policy changes and empirical models of the federal funds rate," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 61-72.
  23. Glenn D. Rudebusch, 1999. "Is the Fed too timid? Monetary policy in an uncertain world," Working Papers in Applied Economic Theory 99-05, Federal Reserve Bank of San Francisco.
  24. Tom Stark & Dean Croushore, 2001. "Forecasting with a real-time data set for macroeconomists," Working Papers 01-10, Federal Reserve Bank of Philadelphia.
  25. Ben Bernanke, 1990. "The Federal Funds Rate and the Channels of Monetary Transnission," NBER Working Papers 3487, National Bureau of Economic Research, Inc.
  26. Kozicki, Sharon, 2002. "Comments on 'Forecasting with a real-time data set for macroeconomists'," Journal of Macroeconomics, Elsevier, Elsevier, vol. 24(4), pages 541-557, December.
  27. Chiara Scotti, 2011. "A Bivariate Model of Federal Reserve and ECB Main Policy Rates," International Journal of Central Banking, International Journal of Central Banking, International Journal of Central Banking, vol. 7(3), pages 37-78, September.
  28. Grammig, Joachim & Kehrle, Kerstin, 2008. "A new marked point process model for the federal funds rate target: Methodology and forecast evaluation," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 32(7), pages 2370-2396, July.
  29. Mishkin, F.S., 1988. "What Does The Term Structure Tell Us About Future Inflation?," Papers fb-_88-29, Columbia - Graduate School of Business.
  30. Michael Dueker, 1999. "Measuring monetary policy inertia in target Fed funds rate changes," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 3-10.
  31. Stark, Tom & Croushore, Dean, 2002. "Reply to the comments on 'Forecasting with a real-time data set for macroeconomists'," Journal of Macroeconomics, Elsevier, Elsevier, vol. 24(4), pages 563-567, December.
  32. James D. Hamilton & Oscar Jorda, . "A model for the federal funds rate target," Department of Economics, California Davis - Department of Economics 99-07, California Davis - Department of Economics.
  33. Chuliá, Helena & Martens, Martin & Dijk, Dick van, 2010. "Asymmetric effects of federal funds target rate changes on S&P100 stock returns, volatilities and correlations," Journal of Banking & Finance, Elsevier, vol. 34(4), pages 834-839, April.
  34. Chib, Siddhartha & Greenberg, Edward, 1994. "Bayes inference in regression models with ARMA (p, q) errors," Journal of Econometrics, Elsevier, Elsevier, vol. 64(1-2), pages 183-206.
  35. William Poole, 2005. "How predictable is Fed policy?," Speech, Federal Reserve Bank of St. Louis 91, Federal Reserve Bank of St. Louis.
  36. Jon Faust & John H. Rogers & Shing-Yi B. Wang & Jonathan H. Wright, 2003. "The high-frequency response of exchange rates and interest rates to macroeconomic announcements," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 784, Board of Governors of the Federal Reserve System (U.S.).
  37. William Poole, 2005. "How predictable is Fed policy?," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 659-68.
  38. Dean Croushore, 1993. "Introducing: the survey of professional forecasters," Business Review, Federal Reserve Bank of Philadelphia, issue Nov, pages 3-15.
  39. Croushore, Dean, 2006. "Forecasting with Real-Time Macroeconomic Data," Handbook of Economic Forecasting, Elsevier, Elsevier.
  40. Frederic S. Mishkin, 1991. "The Information in the Longer Maturity Term Structure about Future Inflation," NBER Working Papers 3126, National Bureau of Economic Research, Inc.
  41. Vanderhart, Peter G., 2000. "The Federal Reserve's Reaction Function under Greenspan: An Ordinal Probit Analysis," Journal of Macroeconomics, Elsevier, Elsevier, vol. 22(4), pages 631-644, October.
  42. Estrella, Arturo & Mishkin, Frederic S., 1997. "The predictive power of the term structure of interest rates in Europe and the United States: Implications for the European Central Bank," European Economic Review, Elsevier, vol. 41(7), pages 1375-1401, July.
  43. Doppelhofer, G. & Weeks, M., 2005. "Jointness of Growth Determinants," Cambridge Working Papers in Economics 0542, Faculty of Economics, University of Cambridge.
  44. Gernot Doppelhofer & Melvyn Weeks, 2009. "Jointness of growth determinants," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 24(2), pages 209-244, 03.
  45. Monika Piazzesi, 2005. "Bond Yields and the Federal Reserve," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 113(2), pages 311-344, April.
  46. Hyeongwoo Kim & John Jackson & Richard Saba, 2009. "Forecasting the FOMC's interest rate setting behavior: a further analysis," Journal of Forecasting, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 28(2), pages 145-165.
Full references (including those not matched with items on IDEAS)

Citations

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:dgr:uvatin:20110093. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Antoine Maartens (+31 626 - 160 892)).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.