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Market-Based Measures of Monetary Policy Expectations

  • Gurkaynak, Refet S.
  • Sack, Brian T.
  • Swanson, Eric P.

A number of recent papers have used short-maturity financial instruments to measure expectations of the future course of monetary policy, and have used high-frequency changes in these instruments around FOMC dates to measure monetary policy shocks. This paper evaluates the empirical success of a variety of market instruments in predicting the future path of monetary policy. We find that federal funds futures dominate other market-based measures of monetary policy expectations at horizons out several months. For longer horizons, the predictive power of many of the instruments considered is very similar. In addition, we present evidence that monetary policy shocks computed using the current-month federal funds futures contract are influenced by changes in the timing of policy actions that do not influence the expected course of policy beyond a horizon of about six weeks. We propose alternative shock measures that capture changes in market expectations of policy over slightly longer horizons.

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Article provided by American Statistical Association in its journal Journal of Business and Economic Statistics.

Volume (Year): 25 (2007)
Issue (Month): (April)
Pages: 201-212

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Handle: RePEc:bes:jnlbes:v:25:y:2007:p:201-212
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  8. Faust, Jon & Swanson, Eric T. & Wright, Jonathan H., 2004. "Identifying VARS based on high frequency futures data," Journal of Monetary Economics, Elsevier, vol. 51(6), pages 1107-1131, September.
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  18. Joel T. Krueger & Kenneth N. Kuttner, 1996. "The Fed funds futures rate as a predictor of federal reserve policy," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 16(8), pages 865-879, December.
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  21. Brunner, Allan D, 2000. "On the Derivation of Monetary Policy Shocks: Should We Throw the VAR Out with the Bath Water?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(2), pages 254-79, May.
  22. John B. Carlson & Jean M. McIntire & James B. Thomson, 1995. "Federal funds futures as an indicator of future monetary policy: a primer," Economic Review, Federal Reserve Bank of Cleveland, issue Q I, pages 20-30.
  23. Robertson, John C & Tallman, Ellis W, 2001. "Improving Federal-Funds Rate Forecasts in VAR Models Used for Policy Analysis," Journal of Business & Economic Statistics, American Statistical Association, vol. 19(3), pages 324-30, July.
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