IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this article or follow this journal

Interest Rate Forecasts: A Pathology

  • Charles A. E. Goodhart

    (Financial Markets Group, London School of Economics)

  • Charles Wen Bin Lim

    (Financial Markets Group, London School of Economics)

Registered author(s):

    This paper examines how well forecasters can predict the future time path of (policy-determined) short-term interest rates. Most prior work has been done using U.S. data; in this exercise we use forecasts made for New Zealand by the Reserve Bank of New Zealand (RBNZ) and those derived from money market yield curves in the United Kingdom.We broadly replicate recent U.S. findings for New Zealand and the United Kingdom, to show that such forecasts in New Zealand and the United Kingdom have been excellent for the immediate forthcoming quarter, reasonable for the next quarter, and useless thereafter. Moreover, when ex post errors are assessed depending on whether interest rates have been in an upward, or downward, section of the cycle, they are shown to have been biased and, apparently, inefficient.We attempt to explain those findings, and examine whether the apparent ex post forecast inefficiencies may still be consistent with ex ante forecast efficiency. We conclude, first, that the best forecast may be a hybrid containing a specific forecast for the next six months and a “no-change” assumption thereafter, and, second, that the modal forecast for interest rates, and maybe for other variables as well, is skewed, generally underestimating the likely continuation of the current phase of the cycle.

    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://www.ijcb.org/journal/ijcb11q2a5.pdf
    Download Restriction: no

    File URL: http://www.ijcb.org/journal/ijcb11q2a5.htm
    Download Restriction: no

    Article provided by International Journal of Central Banking in its journal International Journal of Central Banking.

    Volume (Year): 7 (2011)
    Issue (Month): 2 (June)
    Pages: 135-171

    as
    in new window

    Handle: RePEc:ijc:ijcjou:y:2011:q:2:a:5
    Contact details of provider: Web page: http://www.ijcb.org/

    No references listed on IDEAS
    You can help add them by filling out this form.

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

    When requesting a correction, please mention this item's handle: RePEc:ijc:ijcjou:y:2011:q:2:a:5. 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: (Timo Laurmaa)

    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.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.