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Measuring Expectations

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  • Kjellberg, David

    (Department of Economics)

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    Abstract

    To evaluate measures of expectations I examine and compare some of the most common methods for capturing expectations: the futures method which utilizes financial market prices, the VAR forecast method, and the survey method. I study average expectations on the Federal funds rate target, and the main findings can be summarized as follows: i) the survey measure and the futures measure are highly correlated; the correlation coefficient is 0.81 which indicates that the measures capture the same phenomenon, ii) the survey measure consistently overestimates the realized changes in the interest rate, iii) the VAR forecast method shows little resemblance with the other methods.

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    File URL: http://uu.diva-portal.org/smash/get/diva2:110983/FULLTEXT01.pdf
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    Bibliographic Info

    Paper provided by Uppsala University, Department of Economics in its series Working Paper Series with number 2006:9.

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    Length: 46 pages
    Date of creation: Feb 2006
    Date of revision:
    Handle: RePEc:hhs:uunewp:2006_009

    Contact details of provider:
    Postal: Department of Economics, Uppsala University, P. O. Box 513, SE-751 20 Uppsala, Sweden
    Phone: + 46 18 471 25 00
    Fax: + 46 18 471 14 78
    Email:
    Web page: http://www.nek.uu.se/
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    Keywords: Interest rates; expectations; futures; VAR forecasts; survey data;

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    References

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    1. Pierluigi Balduzzi & Edwin J. Elton & T. Clifton Green, 1997. "Economic News and the Yield Curve: Evidence from the U.S. Treasury Market," New York University, Leonard N. Stern School Finance Department Working Paper Seires 98-005, New York University, Leonard N. Stern School of Business-.
    2. Kuttner, Kenneth N., 2001. "Monetary policy surprises and interest rates: Evidence from the Fed funds futures market," Journal of Monetary Economics, Elsevier, vol. 47(3), pages 523-544, June.
    3. Charles Evans & Kenneth Kuttner, 1998. "Can VARs describe monetary policy?," Research Paper 9812, Federal Reserve Bank of New York.
    4. Gurkaynak, Refet S. & Sack, Brian T. & Swanson, Eric P., 2007. "Market-Based Measures of Monetary Policy Expectations," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 25, pages 201-212, April.
    5. Refet Gürkaynak & Justin Wolfers, 2005. "Macroeconomic Derivatives: An Initial Analysis of Market-Based Macro Forecasts, Uncertainty, and Risk," NBER Chapters, in: NBER International Seminar on Macroeconomics 2005, pages 11-50 National Bureau of Economic Research, Inc.
    6. Lai, Kon S., 2004. "On structural shifts and stationarity of the ex ante real interest rate," International Review of Economics & Finance, Elsevier, vol. 13(2), pages 217-228.
    7. Ben S. Bernanke & Kenneth N. Kuttner, 2004. "What explains the stock market's reaction to Federal Reserve policy?," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2004-16, Board of Governors of the Federal Reserve System (U.S.).
    8. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 1994. "The effects of monetary policy shocks: evidence from the Flow of Funds," Working Paper Series, Macroeconomic Issues 94-2, Federal Reserve Bank of Chicago.
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    11. Söderström, Ulf, 1999. "Predicting monetary policy using federal funds futures prices," Working Paper Series in Economics and Finance 307, Stockholm School of Economics.
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    13. Nolte, Ingmar & Pohlmeier, Winfried, 2007. "Using forecasts of forecasters to forecast," International Journal of Forecasting, Elsevier, vol. 23(1), pages 15-28.
    14. Monika Piazzesi & Eric Swanson, 2004. "Future prices as risk-adjusted forecasts of monetary policy," Proceedings, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco, issue Mar.
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    16. Carlson, John A & Parkin, J Michael, 1975. "Inflation Expectations," Economica, London School of Economics and Political Science, London School of Economics and Political Science, vol. 42(166), pages 123-38, May.
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    19. Steven P. Peterson, 2001. "Rational Bias In Yield Curve Forecasts," The Review of Economics and Statistics, MIT Press, vol. 83(3), pages 457-464, August.
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    21. Glenn D. Rudebusch, 1996. "Do measures of monetary policy in a VAR make sense?," Working Papers in Applied Economic Theory 96-05, Federal Reserve Bank of San Francisco.
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    24. Faust, Jon & Rogers, John H. & Wang, Shing-Yi B. & Wright, Jonathan H., 2007. "The high-frequency response of exchange rates and interest rates to macroeconomic announcements," Journal of Monetary Economics, Elsevier, vol. 54(4), pages 1051-1068, May.
    25. George A. Akerlof & William T. Dickens & George L. Perry, 2000. "Near-Rational Wage and Price Setting and the Long-Run Phillips Curve," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 31(1), pages 1-60.
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    Cited by:
    1. Sören Blomquist & Vidar Christiansen & Luca Micheletto, 2008. "Public Provision of Private Goods and Nondistortionary Marginal Tax Rates," CESifo Working Paper Series 2303, CESifo Group Munich.
    2. Hallberg, Daniel, 2006. "Cross-national differences in income poverty among Europe´s 50+," Working Paper Series, Uppsala University, Department of Economics 2006:14, Uppsala University, Department of Economics.
    3. Per Engström & Bertil Holmlund, 2006. "Tax Evasion and Self-Employment in a High-Tax Country: Evidence from Sweden," CESifo Working Paper Series 1736, CESifo Group Munich.
    4. Ågren, Martin, 2006. "Prospect Theory and Higher Moments," Working Paper Series, Uppsala University, Department of Economics 2006:24, Uppsala University, Department of Economics.
    5. Tine Janžek & Petra Ziherl, 2013. "Overview of models and methods for measuring economic agent’s expectations," IFC Bulletins chapters, in: Bank for International Settlements (ed.), Proceedings of the Sixth IFC Conference on "Statistical issues and activities in a changing environment", Basel, 28-29 August 2012., volume 36, pages 172-179 Bank for International Settlements.

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