Measuring monetary policy expectations from financial market instruments
AbstractThis paper reviews the main instruments and associated yield curves that can be used to measure financial market participants’ expectations of future UK monetary policy rates. We attempt to evaluate these instruments and curves in terms of their ability to forecast policy rates over the period from October 1992, when the United Kingdom first adopted an explicit inflation target, to March 2007. We also investigate several model-based methods of estimating forward term premia, in order to calculate riskadjusted forward interest rates. On the basis of both in and out-of-sample test results, we conclude that, given the uncertainties involved, it is unwise to rely on any one technique to measure policy rate expectations and that the best approach is to take an inclusive approach, using a variety of methods and information. JEL Classification: E43, E44, E52
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Date of creation: Dec 2008
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Other versions of this item:
- Joyce, Michael & Relleen, Jonathan & Sorensen, Steffen, 2008. "Measuring monetary policy expectations from financial market instruments," Bank of England working papers 356, Bank of England.
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-01-03 (All new papers)
- NEP-CBA-2009-01-03 (Central Banking)
- NEP-FOR-2009-01-03 (Forecasting)
- NEP-MAC-2009-01-03 (Macroeconomics)
- NEP-MON-2009-01-03 (Monetary Economics)
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